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**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549







**FORM
      10-K**





(Mark
      One)


x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      fiscal year ended November 30, 2005





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from _______________ to
      _______________





Commission
      file number 0-27046





**TRAFFIX,
      INC.**


(Exact
      name of registrant as specified in its charter)




Delaware
              (State
                or other jurisdiction ofincorporation
                or organization)
            
            22-3322277
              (I.R.S.
                EmployerIdentification
                No.)One
                Blue Hill Plaza
              Pearl
                River, New York
              (Address
                of principal executive offices
            
            10965
              (Zip
                Code)Registrant's
              telephone number, including area code:
            
            (845)
                620-1212Title
                of Class
            Exchange
                on Which RegisteredSecurities
                registered pursuantto
                Section 12(b) of the Act:
            Common
                Stock$.001
                Par Value
            NASDAQ
                National MarketSecurities
                registered pursuantto
                Section 12(g) of the Act:
            Common
                Stock$.001
                Par Value





Indicate
        by check mark if the Registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.     Yes o 
No x




Indicate
      by check mark if the
      Registrant is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Act.     Yes o   No x




Indicate
      by check mark whether the
      Registrant (1) has filed all reports required to be filed by Section 13 or
      15(d)
      of the Securities Exchange Act of 1934 during the preceding 12 months (or for
      such shorter period that the Registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days. Yes
x  
No
      o





Indicate
      by check mark if disclosure of
      delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
      chapter) is not contained herein, and will not be contained, to the best of
      Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o





Indicate
      by check mark whether the
      registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer. See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  o    Accelerated
      filer  o   Non-accelerated
      filer  x





Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).    Yes o   No
        x




The
      number of shares outstanding of the
      Registrant's common stock is 14,242,318 (as of 2/24/06). The aggregate market
      value of the voting stock held by nonaffiliates of the Registrant
      was $62,666,078 (as of 2/24/06, based upon a closing price of the Company’s
      Common Stock on the Nasdaq National Market on such date of $5.26).





**DOCUMENTS
      INCORPORATED BY REFERENCE**





None.







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**TRAFFIX,
      INC.**


**INDEX
      TO ANNUAL REPORT ON FORM 10-K**


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**FOR
      THE FISCAL YEAR ENDED NOVEMBER 30, 2005**





ITEMS
      IN FORM 10-K


PagePart
                IItem
                1. Business
            1Item
                1A. Risk FactorsItem
                1B. Unresolved Staff Comments
            NoneItem
                2. Properties.Item
                3. Legal ProceedingsItem
                4. Submission of Matters to a Vote of Security
                Holders
            N/APart
                IIItem
                5. Market for the Registrant's Common Equity, Related
                Stockholder Matters and Issuer Purchases of Equity
                SecuritiesItem
                6. Selected Financial DataItem
                7. Management's Discussion and Analysis of Financial
                Condition and Results of OperationsItem
                7A. Quantitative and Qualitative Disclosures About Market
                Risk
            N/AItem
                8. Financial Statements and Supplementary
                DataItem
                9. Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            N/AItem
                9A. Controls and ProceduresItem
                9B. Other InformationPart
                IIIItem
                10. Directors and Executive Officers of the
                RegistrantItem
                11. Executive CompensationItem
                12. Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder MattersItem
                13. Certain Relationships and Related
                TransactionsItem
                14. Principal Accountant Fees and
                ServicesPart
                IVItem
                15. Exhibits, Financial Statement
                SchedulesSignatures







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*FORWARD
      LOOKING INFORMATION*


*MAY
      PROVE INACCURATE*





*This
      Annual Report on Form 10-K* , *including
      without limitation the Business section and Management’s Discussion and Analysis
      of Financial Condition and Results of Operations,*  *contains
      certain forward-looking statements and information relating to the Company
      that
      is based on our current beliefs, as well as current assumptions made by and
      information currently available to us. When used in this document, the words
      "anticipate," "believe," "estimate," and "expect" and similar expressions,
      as
      they relate to us, are intended to identify forward-looking statements. Such
      statements reflect our current views with respect to future events and are
      subject to certain risks, uncertainties and assumptions, including those
      described in this Annual Report on Form 10-K. Should one or more of these risks
      or uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results may vary materially from those described herein as anticipated,
      believed, estimated or expected. We do not intend to update these
      forward-looking statements.*





**Item
      1. BUSINESS**





**Overview**





We
      are a
      leading Internet media and marketing company that provides complete end-to-end
      marketing solutions for our clients, which include advertisers, direct
      marketers, and agencies, seeking to increase sales and customer contact through
      on-line marketing channels. The services we offer include the development of
      a
      complete creative promotion used to market our client's product and/or service
      to consumers online. In the provision of our client services we use all major
      online marketing channels, including email promotions to generate new customers
      for our clients; the delivery of data files indicating the results of the email
      promotions; the creation and hosting of customized websites and/or web pages
      to
      facilitate consumer transactions for our clients; generating comprehensive
      reporting of website activity allowing our clients to analyze the effectiveness
      of the promotion; and providing revenue generating potential for our clients
      through affiliate marketing opportunities. We use this media platform to
      generate customers, sales and leads for our own service offers, in addition
      to
      our clients. We generate revenue for our clients primarily on a
      performance-based model, under which we record revenue upon the successful
      delivery to our client of a qualifying lead, customer, survey, completed
      application or ultimate sale.




We
      also
      generate revenue directly from consumers through our “direct-to-consumer”
business, which includes Internet based services, such as (a) iMatchUp.com,
      our
      on-line dating service included in our E-commerce segment; and (b) other service
      offers that comprise our LEC Billed Products segment. Our on-line dating service
      continues to be marketed. We discontinued new customer acquisitions of our
      LEC
      Billed products in Fiscal 2004, but we continue to actively seek out other
      LEC
      services that exhibit the potential for acceptable economic returns. The LEC
      Billed Products do not have any long-lived assets associated with the segment.
      These “direct-to-consumer” services generated approximately $9.5 million, or 15%
      of our revenue during the fiscal year ended November 30, 2005, as compared
      to
      approximately $8.9 million, or 24% of our revenue during the fiscal year ended
      November 30, 2004, and $5.5 million, or 17% of our revenue during the fiscal
      year ended November 30, 2003.




We
      made
      one asset acquisition in each of Fiscal 2004 and 2005. These asset acquisitions
      accounted for approximately $16.6 million of E-commerce segment revenue, or
      approximately 26% of consolidated Fiscal 2005 revenues. Such asset acquisitions
      are described in more detail below, and further described in the notes to the
      November 30, 2005 consolidated financial statements included
      herein.




We
      also
      generate revenues from the sales, rentals and management (for use both on-line
      and off-line) of our proprietary, profiled databases, which revenue is included
      in our E-commerce segment.




**On-Line
      Marketing**





We
      own
      and operate a variety of Internet websites featuring specialized content such
      as
      on-line dating, downloadable music, recipes, greeting cards, automobile
      information, DVD promotions, and other theme-based content. We generate traffic
      to our websites from advertising on third party Internet media (i.e., search
      engines, email and banner advertisements) and through cross-marketing within
      our
      own on-line media. Our Web properties and our marketing activities are designed
      to generate real-time response-based marketing results for our corporate
      clients. When visiting our on-line properties, consumers are given the
      opportunity to purchase, sign-up for, ask to be contacted regarding, or simply
      indicate an interest in, hundreds of offers for various products and services.
      Specifically, through these interactive Web properties we generate a variety
      of
      transactional results ranging from (a) Web traffic, (b) inbound telemarketing
      calls, (c) outbound telemarketing leads, (d) demographically/psychographically
      profiled lists of consumers, (e) highly-targeted customized response-based
      leads, (f) completed applications for products, and (g) sales of products and
      services.




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*Websites.* We
      own
      and operate a variety of websites with a broad range of content. Virtually
      all
      of our websites generate revenue from client advertisements. The advertisements
      are served across all of our websites using our internally-developed technology
      that serves ads to website visitors using an algorithm that takes into account
      a
      number of factors including information supplied by the visitor upon
      registration (e.g., gender, age, zip code), as well as the price paid by our
      customer to serve the advertisement.




The
      websites feature content ranging from music for downloads to sweepstakes offers.
      We launched EZ-Tracks.com in Fiscal 2004, a site that features over 30,000
      songs
      available for free and legal downloading, as well as other content such as
      musical greeting cards and a downloadable version of the Bible in audio format.
      We have a games website that offers a variety of free parlor-style games, such
      as backgammon and checkers. In Fiscal 2004 we also launched reciperewards.com,
      a
      website that features thousands of cooking recipes.




Our
      PrizeDistributors, Inc. sponsored group of websites offers consumers the
      opportunity to win up to $1 million daily in our free, on-line sweepstakes.
      The
      sweepstakes prizes are indemnified by an independent, third-party agency. In
      order to play, each consumer must provide complete and accurate registration
      information and agree to receive ("opt-in") marketing messages from us and
      our
      marketing partners and affiliates.




We
      own
      and operate several other websites such as Music of Faith.com,
      AtlasCreditGroup.com, TheBargainSpot.com, AltasAutomotiveGroup.com,
      EZGreets.com, GameFiesta.com, PrizeAmerica.com and LoveFreeGames.com. Each
      of
      these sites is designed to appeal to a specific consumer interest category
      that
      we matched with client promotions that appeal to such interest category.




*Email
      Marketing.* Each
      program that we market for our clients can be implemented not only through
      our
      websites, but also, and often, through email marketing. We currently market
      to a
      vast database, which includes consumer data that is either owned by us or is
      managed by us under our revenue share arrangements, whereby we recognize the
      gross revenue as earned and bear the payment obligation to the list owner,
      irrespective of receipt of payment from our clients.




*Results
      Analysis.* Subsequent to a campaign being fully implemented, we continually analyze the
      marketing results to gauge whether the campaigns are continuing to generate
      an
      adequate result for the client, whether the media is being utilized
      cost-efficiently, and to determine whether new and different copy is yielding
      better overall results. These are traditional direct-marketing disciplines
      that
      we apply and that we believe distinguish us from many of our competitors in
      the
      on-line marketing industry.




*Affiliate
      Marketing.* Our
      affiliate marketing business commenced in late Fiscal 2005 under the name of
      RocketProfit.com. We have created an affiliate destination where publishers
      and
      advertisers can make available to themselves our unique and exclusive deals,
      customized promotions, high payouts, detailed tracking capabilities, and
      significant multi-level customer support.




*Syndication.* After we
      develop a campaign that works efficiently on our own media, we sometimes
      "syndicate" the program to third-party media. Typically, we have expended time,
      media and other costs in developing certain campaigns. In exchange for this
      invested effort, we obtain the right to market those campaigns to other on-line
      media companies. We believe that with syndicated offers we can leverage
      campaigns we have developed so that in future fiscal periods we can generate
      additional revenue with reduced costs and risks associated with such business
      extension.




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**OTHER
      SERVICES**





We
      introduced several new business units during the past three fiscal years, and
      continued to expand a portion of these new business units in Fiscal 2005,
      specifically our on-line dating program conducted over the Internet
      ("iMatchup.com") which is included in our E-commerce segment. These new business
      units are designed as monthly recurring billing programs, such as a membership
      to iMatchUp.com. Revenue from these businesses is generated by directly billing
      consumers. Our on-line dating business became a significant source of our
      revenue in Fiscal 2004 and continued into Fiscal 2005, generating approximately
      13% and 18% of our consolidated revenue for Fiscal 2005 and 2004, respectively.




Our
      expansion in, and dependence on, our on-line direct marketing efforts, coupled
      with the potential for state and/or federal legislation limiting our ability
      to
      contact consumers on-line should all be considered when referring to our current
      fiscal year’s results, as well as prior year’s historical results, in evaluating
      the potential for our future operations, cash flows, and financial
      position.




**Background**





From
      our
      inception in 1993 (under the name "Quintel Communications, Inc.") through 1999,
      we generated the bulk of our revenue from direct marketing using the traditional
      media of television, postal mail and telemarketing. In 2000, we repositioned
      our
      direct marketing business to the on-line media of the Web. Applying the
      marketing disciplines honed from our years of operating in the "off-line" media
      arena, we have been able to provide enhanced response-based results in a
      cost-effective and scaleable manner via on-line marketing. During December
      1995
      we completed our initial public offering of common stock, which is publicly
      traded and is reported on the NASDAQ National Market under the symbol “TRFX”.




**Segment
      Information**





During
      the fiscal year ended November 30, 2005, we generated revenue from the following
      segments: E-Commerce and LEC Billed Products. The E-Commerce segment currently
      represents the core of our business operations. Revenue in the E-Commerce
      segment is generated primarily from marketing of third party products and
      services on our websites, through email and search engine marketing campaigns,
      and from sales of memberships to our on-line dating service. LEC Billed Products
      consist of our proprietary LEC billed products which were principally
      reintroduced during the fiscal year ended November 30, 2003. We discontinued
      new
      customer acquisitions for this segment during the latter part of the fiscal
      year
      ended November 30, 2004, and any revenues attributable to it are generated
      from
      a declining base of customers acquired in prior fiscal years.




Historically,
      our now discontinued Off-Line Marketing service segment's activities consisted
      of telemarketing services used for the acquisition of long distance and wireless
      phone customers for various phone service providers; however during the fiscal
      years ended November 30, 2002 and 2003, this segment consisted exclusively
      of
      our majority owned subsidiary, Montvale Management, LLC and the revenues and
      expenses of Montvale's net branch services provided to qualified mortgage
      banking and lending institutions. During the fiscal year ended November 30,
      2003
      (specifically, March 2003), we disposed of our interest in Montvale, all as
      more
      fully described in Note 2 included in the attached financial
      statements.




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Segment
      information is set forth in Note 14 to the Consolidated Financial Statements
      referred to in the Financial Statements and Supplementary Data section hereof.
      For a more detailed discussion of our segment information, also see
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations”.




**Competition**





We
      face
      intense competition in the marketing of our services, especially in the conduct
      of our E-commerce segment activities, which form the core of our current
      business model. Many of our competitors are well established, have reputations
      for success in the development and marketing of services and have significant
      financial, marketing, distribution, personnel and other resources. We also
      compete with numerous smaller private companies that are willing to take
      extremely aggressive marketing risks that are outside of the scope of our risk
      tolerance. These extremely aggressive marketing practices and other marketing
      capabilities permit our competitors to implement extensive advertising and
      promotional campaigns, both generally and in response to efforts of other
      competitors, to enter into new markets and introduce new services.




**Seasonality
      and Cyclicality**





We
      believe that the on-line marketing industry is subject to seasonal fluctuations,
      where consumers tend to spend less time at the computer during the summer
      months, which is apparent based on the decrease in Internet traffic during
      such
      months. We generally recognize the fourth and first fiscal quarters of the
      calendar year to be our strongest.




**Insurance**




We
      may be
      subject to substantial liability as a result of our day-to-day operations.
      Accordingly, we maintain a general liability insurance policy that is subject
      to
      a per occurrence limit of $1 million with a $2 million aggregate limit and
      an
      umbrella policy covering an additional $10 million of liability. In
      addition, we have errors and omissions insurance with a limit of $5
      million. We also maintain Directors and Officers liability insurance
      policies providing aggregate coverage of $20 million for legal costs and claims.
      Such insurance may not be sufficient to cover all potential claims and
      additional insurance may not be available in the future at reasonable costs.




**Government
      Regulation**





As
      a
      direct-to-consumer marketing company we are subject to a variety of federal,
      state and local laws and regulations designed to protect consumers that govern
      certain of our marketing practices.




Federal
      legislation was signed into law, effective January 1, 2004, purportedly
      pre-empting existing and pending state e-mail marketing legislation. The
      CAN-SPAM Act of 2003 ("CAN-SPAM") requires that certain "opt-out" procedures,
      including, but not limited to, a functioning return e-mail address, be included
      in commercial e-mail marketing. CAN-SPAM prohibits the sending of e-mail
      containing false, deceptive or misleading subject lines, routing information,
      headers and/or return address information; however, CAN-SPAM does not permit
      consumers to file suit against e-mail marketers for violations of CAN-SPAM.
      We
      believe that this may benefit us, as individuals will be more limited in their
      ability to file frivolous suits against us, as they have in the past. If any
      subsequent federal regulations are enacted, including, but not limited to,
      those
      implementing regulations promulgated by the FTC that limit our ability to market
      our offers, we could potentially realize a material adverse impact in future
      fiscal period net revenue growth, and, therefore, profitability and cash flows
      could be adversely affected.




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In
      contrast to CAN-SPAM, most state deceptive marketing statutes contain private
      rights of action. Such private right of action lawsuits may have an adverse
      impact in future fiscal period net revenue growth, as individuals may be more
      inclined to file frivolous state deceptive marketing suits against
      us.




Under
      its
      rule-making authority, the Federal Communications Commission ("FCC") in
      August 2004 adopted rules prohibiting the sending of unsolicited commercial
      e-mails to wireless phones and pagers. To assist in compliance with the rules,
      the FCC published on February 7, 2005 a list of mail domain names
      associated with wireless devices. Senders were given thirty (30) days to
      come into compliance. Thereafter, it became illegal to send unsolicited
      commercial e-mail to a domain address on the list unless the subscriber gave
      prior express authorization. The effect of these rules is to create a "double
      opt-in" requirement for each sender of mail (advertiser and publisher). The
      practical consequence of these requirements on senders of commercial e-mail
      is
      that conducting compliant campaigns will necessitate the suppression of the
      domains listed in the FCC's list of wireless domains. Additionally, since domain
      suppression is now required as a practical matter by law, any campaigns that
      have domain suppression lists will have those lists included with the regular
      e-mail suppression lists. Our publishers will be required to suppress the domain
      lists associated with each campaign in the same manner that they already
      suppress the e-mail address lists. Although these new regulations do not have
      a
      material adverse impact on our current operations, there can be no assurance
      that they will not have a material adverse impact on our future
      operations.




Under
      its
      rule-making authority, in May 2005, the Department of Justice adopted rules
      that amend the record keeping and inspection requirements for producers of
      sexually explicit performances. Codified in 18 U.S.C. 2257 of the federal
      criminal code, Section 2257, as amended, went into effect on June 23,
      2005 and requires a class referred to as "secondary producers" to comply with
      the record keeping and inspection requirements that apply to primary producers.
      On June 16, 2005, The Free Speech Coalition, Inc. brought an action
      challenging, among other things, the extent to which webmasters and/or web
      sites
      fall under the definition of "secondary producers" under the new
      Section 2257 regulations. In a ruling issued December 28, 2005, the U.S.
      District Court rejected the establishment of a class of “secondary producers”
that would have to comply with the record-keeping and inspection requirements
      of
      Section 2257 and reaffirmed the decision in Sundance Associates v. Reno, which
      held that primary “producers” would be limited to those persons involved in the
“hiring, contracting for, managing, or otherwise arranging for the participating
      of the depicted performer.” Secondary producers will likely still have to comply
      with the labeling requirements of Section 2257, which require that secondary
      producers obtain from the primary producer a letter or other correspondence
      indicating who the custodian of records is, where such records are kept and
      the
      date of production of the material. The ruling in this proceeding is limited
      to
      current or future members of The Free Speech Coalition, Inc. There is the
      risk that the definition of "secondary producers" may be reinstated and/or
      more
      broadly interpreted in the future. At this juncture, Section 2257 has had
      no material effect on our net revenue growth, profitability and cash flows.




The
      states of Michigan and Utah have passed Child Protection Registry laws that
      bar
      the transmission of commercial e-mail to registered state residents under the
      age of eighteen (collectively, the "Statutes"). The Statutes contain provisions
      for fines and jail time for violators, and create a private right of action
      for
      aggrieved parties. Under the Statutes, state residents may register any e-mail
      address, fax number, wireless contact information or instant message identifier
      assigned to the account of a minor or one to which a minor has access. Unlike
      other e-mail marketing statutes, there are no opt-in or pre-existing business
      relationship exceptions. The Statutes provide that once an address of a state
      resident is on the registry for thirty (30) days, commercial e-mailers are
      prohibited from sending to that address anything containing an advertisement,
      or
      even a link to an advertisement, for a product or service that a minor is
      legally prohibited from accessing. Such products and/or services include, but
      are not limited to, alcohol, tobacco, gambling, firearms, automotive, financial,
      prescription drug and adult material. This prohibition remains in force even
      if
      the e-mail or other communication is otherwise solicited. The Free Speech
      Coalition, Inc. has brought an action that challenges certain aspects of
      the Utah Child Protection Registry law; no decision on this proceeding has
      yet
      been rendered. To the extent we market these types of products and/or services,
      we have blocked sending such e-mail to Michigan and Utah residents.




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Legislation
      has been passed in twelve (12) different states that are intended to
      regulate "spyware" and, to a limited extent, the use of "cookies." Of particular
      significance is the Revised Utah Spyware Control Act (the "Utah Act") that
      bars
      a person or company from using a context-based trigger mechanism to display
      an
      advertisement that partially or wholly covers paid advertising or other content
      on a website in a way that interferes with the user's ability to view the
      website. The Utah Act also requires purveyors of pop-up advertising to ask
      whether a user is a resident of the state of Utah before downloading "spyware"
      software onto the user's computer and further allows a trademark owner to sue
      any person or company who displays a pop-up advertisement in violation of a
      specific trademark protection which is set forth in the Utah Act. Similarly,
      the
      State of Alaska has legislation pending that would require such disclosure
      prior
      to downloading "spyware" software onto the user's computer. In practice, we do not provide or use "spyware" in our marketing, but if more
      restrictive legislation is adopted, we may be required to develop new technology
      and/or methods to provide our services or discontinue services in some
      jurisdictions altogether. Additionally, there is a risk that state courts will
      broadly interpret the term "spyware" to include legitimate ad-serving software
      and/or cookie technology that is currently provided or used by us.




At
      the
      federal level, competing bills are pending which are also intended to regulate
      "spyware" and, to a limited extent, the use of "cookies." "Spyware" has not
      been
      precisely defined in existing and pending legislation, but is generally
      considered to include software which is installed on consumers' computers and
      designed to track consumers' activities and collect and possibly disseminate
      information, including personally identifiable information, about those
      consumers without their knowledge and consent. As stated above, we do not
      provide or use "spyware" in our marketing practices, but there is the risk
      that
      the definition of spyware may be broadly interpreted to include legitimate
      ad-serving software and/or cookie technology that is currently provided or
      used
      by us. Anti-spyware legislation has 1) generally included a limited
      exemption for the use of cookies; and 2) focused on providing consumers
      with notification and the option to accept or decline the installation of
      spyware software. However, there can be no assurance that future legislation
      will not incorporate more burdensome standards by which the use of cookies
      will
      not be exempted and software downloading onto consumers' computers will not
      be
      more strictly enforced. If more restrictive legislation is adopted, we may
      be
      required to develop new technology and/or methods to provide our services or
      discontinue services in some jurisdictions altogether.




Legislation
      has also been passed at the state level and competing bills are pending at
      the
      federal level which are intended to require that businesses and institutions
      provide notice to consumers of any potential theft or loss of sensitive consumer
      information then in possession of the applicable business or institution. At
      the
      state level, laws that recently took effect in the states of Illinois,
      Louisiana, Minnesota, New Jersey and New York require companies, governmental
      agencies and private organizations to notify individuals in cases where their
      confidential information has been exposed to possible data thieves (the "New
      State Laws"). Upon taking effect on December 31, 2005 and, alternatively,
      January 1, 2006, the New State Laws make customer notification mandatory in
      the
      event that personally identifiable information (including, but not limited
      to,
      social security numbers, driver's license numbers or bank and financial account
      numbers) has been accessed improperly by third parties. The New State Laws
      are
      in addition to similar laws previously in effect in at least fifteen other
      states including the states of Arkansas, California, Connecticut, Delaware,
      Florida, Georgia, Maine, Montana, Nevada, North Carolina North Dakota, Ohio,
      Pennsylvania, Rhode Island, Tennessee, Texas and Washington that all require
      consumer notification where confidential or sensitive information has been
      improperly accessed, lost or stolen (together with the New State Laws, the
      “Information Security Laws”). To the extent that we collect such personally
      identifiable information, the Information Security Laws may increase our costs
      to protect such information.




At
      the
      Federal level, the FTC, pursuant to its enforcement authority, filed a complaint
      against BJ's Wholesale Club, Inc. ("BJ's") for violation of the FTC Act in
      connection with the theft of consumer credit/debit card information which was
      then in BJ's possession. The FTC alleged that BJ's failure to secure customers'
      sensitive information was an unfair practice under the FTC Act because it caused
      substantial injury that was not reasonably avoidable by consumers and not
      outweighed by offsetting benefits to consumers or competition. BJ's agreed
      to a
      settlement that requires BJ's to establish and maintain a comprehensive
      information security program that includes administrative, technical and
      physical safeguards. Although we do not anticipate that this interpretation
      of
      the FTC Act, nor the Information Security Laws requiring notice of theft or
      loss
      of sensitive consumer information, will have a material adverse impact on our
      current operations, we could potentially be subject to regulatory proceedings
      for past and current practices in connection with the storage and security
      of
      sensitive consumer information and notice of such sensitive consumer
      information's theft or loss. In addition, we may be required to make changes
      in
      our future practices relating to the storage, security and provision of notice
      in connection with sensitive consumer information.




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At
      present, the laws and regulations governing the Internet remain largely
      unsettled, even in areas where there has been legislative and/or regulatory
      action. It is uncertain as to how long it will take to determine the extent
      to
      which existing laws, including, but not limited to, those relating to
      intellectual property, advertising, sweepstakes and privacy, apply to the
      Internet and Internet marketing. Recently, growing public concern regarding
      privacy and the collection, distribution and use of Internet user information
      has led to increased Federal and state scrutiny, as well as regulatory activity
      concerning data collection, record keeping, storage, security, notification
      of
      data theft, and associated use practices. The application of existing laws
      or
      the adoption or modification of laws or regulations in the future, together
      with
      increased regulatory scrutiny, could materially and adversely affect our
      business, prospects, results of operations and financial condition and could
      potentially expose us and/or our clients to fines, litigation, cease and desist
      orders and civil and criminal liability.




**Employees**





We
      currently employ 89 full-time employees, including five executive officers,
      and
      2 part-time employees in the U.S. and 79 full-time employees in Canada. We
      believe that our relations with our employees are satisfactory. None of our
      employees are represented by a union.




**Available
      Information**





Our
      Internet address is www.traffixinc.com. We make available, free of charge
      through such website, our annual report on Form 10-K, quarterly reports on
      Form
      10-Q, current reports on Form 8-K, and any amendments to those reports filed
      or
      furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
      of
      1934 as soon as reasonably practicable after we electronically file such
      material with, or furnish it to, the Securities and Exchange Commission (SEC).




The
      public may read and copy any materials we file with the SEC at the SEC’s Public
      Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information
      on
      the operation of the Public Reference Room may be obtained by calling SEC at
      1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
      and information statements, and other information regarding our Company that
      we
      file electronically with the SEC.




Any
      and
      all information found on our website is not part of this or any other report
      we
      file with or furnish to the SEC .




**Code
      of Ethics and Business Conduct**





We
      have
      adopted a Code of Ethics and Business Conduct (the “Code”) for our principal
      executive and financial and accounting officers, and our directors, employees,
      agents, and consultants. The Code is publicly available on our website at www.traffixinc.com under
“Investor Relations”, “Corporate Governance” and “Code of Ethics”. The Code
      addresses various issues regarding the practice of ethical conduct applied
      to
      all levels of our personnel in all the phases of their business activities
      and
      of their responsibility of reporting illegal or unethical behavior.




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We
      have
      also established an accounting ethics complaint procedure for all employees
      to
      report concerns they might have regarding accounting, internal accounting
      controls and auditing matters. All complaints are treated confidentially, and
      we
      do not, and will not condone any retaliation of any kind against employees
      who
      come forward with complaints.


Item
        1A.RISK
        FACTORS
 
 From
        time
        to time, including in this Annual Report on Form 10-K, we publish
        forward-looking statements, as disclosed in our Disclosure Regarding
        Forward-Looking Statements, beginning immediately following the Table of
        Contents of this Annual Report. We note that a variety of factors could cause
        our actual results and experience to differ materially from the anticipated
        results or other expectations expressed or anticipated in our forward-looking
        statements. The factors listed below are illustrative of the risks and
        uncertainties that may arise and that may be detailed from time to time in
        our
        public announcements and our filings with the Securities and Exchange
        Commission, such as on Forms 8-K, 10-Q and 10-K. We undertake no obligation
        to make any revisions to the forward-looking statements contained in this
        Annual
        Report on Form 10-K to reflect events or circumstances occurring after the
        date of the filing of this report.
 
 *We
        May Not Continue To Pay Dividends On Our Equity Securities.*
 
 We
        have
        paid a dividend of $0.08 per share of our common stock in each of the last
        eleven fiscal quarters. The declaration of each of such dividends was approved
        by our Board of Directors upon the conclusion of each quarter. We can give
        you
        no assurances that our Board will declare any dividends in future fiscal
        periods. Any further declarations will depend upon our performance, the level
        of
        our then current and retained earnings and other pertinent factors relating
        to
        our financial position. You should not rely on any prior approvals of our
        Board
        as an indicator of its intent to approve the declaration of any dividends
        in the
        future.
 
 *Advertisers
        May Be Reluctant To Devote A Portion Of Their Budgets To Internet Advertising
        And Digital Marketing Solutions.*
 
 Companies
        doing business on the Internet must compete with traditional advertising
        media,
        including television, radio, cable and print, for a share of advertisers'
        total
        marketing budgets. Potential customers may be reluctant to devote a significant
        portion of their marketing budget to Internet advertising or digital marketing
        if they perceive the Internet to be a limited or ineffective marketing medium.
        Any shift in marketing budgets away from Internet advertising spending or
        digital marketing solutions could materially and adversely affect our business,
        results of operations and financial condition.
 
 *We
        May Not Be Able To Comply With The Adoption Of Newly Created Laws And
        Governmental Regulation Of The Internet Industry And New Restrictions For
        Internet Use May Increase Our Cost Of Doing Business.*
 
 As
        a
        direct-to-consumer marketing company we are subject to a variety of federal,
        state and local laws and regulations designed to protect consumers that govern
        certain of our marketing practices, all as more fully set forth in this Annual
        Report under the heading “Business - Government Regulation.”
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 *Demand
        For Our Services May Decline Due To The Proliferation Of "Spam" And Software
        Designed To Prevent Its Delivery.*
 
 Our
        business may be adversely affected by the proliferation of "spam" and other
        unwanted Internet solicitations. In response to such proliferation, Internet
        Service Providers ("ISP's") have been adopting technologies, and individual
        computer users are installing software on their computers, that are designed
        to
        prevent the delivery of certain Internet advertising, including legitimate
        solicitations such as those delivered by us. We cannot assure you that the
        number of ISP's and individual computer users who employ these or other similar
        technologies and software will not increase, thereby diminishing the efficacy
        of
        our services. In the case that one or more of these technologies are widely
        adopted or the software widely utilized, demand for our services would decline.
 
 *We
        May Be Unable To Keep Up With The Rapid Technological Changes That May Occur
        In
        The Internet And E-Commerce Arenas Which Would Adversely Affect Our Business
        Operations.*
 
 To
        remain
        competitive, we must enhance and continually improve the responsiveness,
        functionality and features of our services. The Internet and the online commerce
        industry are characterized by rapid technological change, changes in user
        and
        customer requirements and preferences, frequent new product and service
        introductions embodying new technologies, and the emergence of new industry
        standards and practices that could render existing technology and systems
        obsolete at any time. Our success will depend, in part, on our ability to
        license leading technologies that address the increasingly sophisticated
        and
        varied needs of prospective consumers, and respond to technological advances
        and
        emerging industry standards and practices on a cost-effective and timely
        basis.
        The development of a website and other proprietary technology entails
        significant technical and business risks. There can be no assurance that
        we will
        use new technologies effectively or adapt existing websites and operational
        systems to customer requirements or emerging industry standards. If we are
        unable, for technical, legal, financial or other reasons, to adapt in a timely
        manner in response to changing market conditions or customer requirements,
        our
        business, prospects, financial condition and results of operations would
        be
        materially adversely affected.
 
 *We
        Depend On Third-Party Internet And Telecommunications Providers, Over Whom
        We
        Have No Control, To Operate Our Services. Interruptions In These Services
        Caused
        By One Of The Providers Could Have An Adverse Effect On Revenue And Securing
        Alternate Sources Of These Services Could Significantly Increase Expenses.*
 
 We
        depend
        heavily on several third-party providers of Internet and related
        telecommunication services, including hosting and co-location facilities,
        in
        operating our services. These companies may not continue to provide services
        to
        us without disruptions in service, at the current cost or at all. The costs
        associated with any transition to a new service provider would be substantial,
        requiring the reengineering of computer systems and telecommunications
        infrastructure to accommodate a new service provider. This process would
        be both
        expensive and time-consuming. In addition, failure of the Internet and related
        telecommunications providers to provide the data communications capacity
        in the
        time frame required by us could cause interruptions in the services we provide.
        Unanticipated problems affecting our computer and telecommunications systems
        in
        the future could cause interruptions in the delivery of services, causing
        a loss
        of revenue and potential loss of customers.
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  *Customers
          May Refuse To Pay Our Fees For Services Rendered, As Billed By The Local
          Exchange Carriers.*
 
 We
        currently market products that are billed to consumers directly on their
        telephone bills through their Local Exchange Carriers, or LEC's. Regulation
        in
        the United States provides that a consumer's telephone service may not be
        discontinued for failure to pay for products such as our LEC billed products.
        In
        the event of nonpayment by consumers or the provision of refunds or credits
        by
        the LEC's, we will suffer a reduction to our anticipated revenues. We maintain
        a
        reserve for consumer chargebacks for just such scenarios, and the reserve
        is
        estimated based on the amount of our historical chargebacks, which includes
        refunds, credits and uncollectible charges. We cannot assure you, however,
        that
        our reserves will be adequate to cover actual chargebacks.
 
 *We
        Face Intense Competition In The Marketing Of Products And Services.*
 
 We
        face
        intense competition in the direct marketing of products and services. Many
        of
        our competitors are well established, have reputations for success in the
        development and marketing of services and have significant financial, marketing,
        distribution, personnel and other resources. These financial and other
        capabilities permit such companies to implement extensive advertising and
        promotional campaigns, both generally and in response to efforts by additional
        competitors to enter into new markets and introduce new services.
 
 *Our
        Success Depends On Our Ability To Continue Forming Relationships With Other
        Internet And Interactive Media Content And Product Providers.*
 
 The
        Internet includes an ever-increasing number of businesses that offer and
        market
        consumer products and services. These entities offer advertising space on
        their
        websites, as well as profit sharing arrangements for joint effort marketing
        programs. We expect that with the increasing number of entrants into the
        Internet commerce arena, advertising costs and joint effort marketing programs
        will become extremely competitive. This competitive environment might prevent
        us
        from executing profit generating advertising and joint effort marketing programs
        in the future. This competitive environment may also prevent us from providing
        entertaining content and product and service providers from marketing their
        products and services through our websites. If we fail to continue establishing
        new, and maintain existing, profitable advertising and joint marketing
        arrangements, we may suffer substantial adverse consequences to our financial
        condition and results of operations.
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 *The
        Outcome Of Litigation In Which We Have Been Named As A Defendant Is
        Unpredictable And A Materially Adverse Decision In Any Such Matter Could
        Have A
        Material Adverse Affect On Our Financial Position And Results Of Operations.*
 
 We
        are
        defendants in litigation matters, as described under "Legal Proceedings"
        in our
        periodic reports filed pursuant to the Securities Exchange Act of 1934. These
        claims may divert financial and management resources that would otherwise
        be
        used to benefit our operations. Although we believe that we have meritorious
        defenses to the claims made in each and all of the litigation matters to
        which
        we have been named a party, and intend to contest each lawsuit vigorously,
        no
        assurances can be given that the results of these matters will be favorable
        to
        us. A materially adverse resolution of any of these lawsuits could have a
        material adverse affect on our financial position and results of operations.
 
 *We
        Are Dependent On Our Key Personnel For Managing Our Business Affairs. The
        Loss
        Of Their Services Could Materially And Adversely Affect The Conduct Of Our
        Business.*
 
 We
        are
        and will be highly dependent upon the efforts of the members of our management
        team, particularly those of our Chief Executive Officer, Jeffrey L. Schwartz,
        and our President, Andrew Stollman. The loss of the services of
        Messrs. Schwartz or Stollman may impede the execution of our business
        strategy and the achievement of our business objectives. We can give you
        no
        assurance that we will
        be
        able to attract and retain the qualified personnel necessary for the development
        of our business. Our failure to recruit key personnel or our failure to
        adequately train, motivate and supervise our existing or future personnel
        will
        adversely affect our operations.
 
 *Our
        Business Plan Is Subject To Change And Any Expectations We And You May Have
        For
        Its Successful Implementation May Be Unrealized.*
 
 Our
        business plan and strategy may quickly change based upon facts or circumstances
        currently unforeseen by us. Due to the ever changing nature of the e-commerce
        industry and the Internet, we, based upon these unforeseen facts or
        circumstances, may change our business plan at the discretion of our Management
        and Board of Directors with results, adverse or otherwise, that we cannot
        now
        foresee.
 
 *The
        Concentration Of Ownership Of Our Common Stock Will Discourage Purchases
        Of Our
        Common Stock By Persons Who Might Otherwise Seek To Gain Control Of Traffix.*
 
 Our
        executive officers and directors beneficially own 2,467,715 shares of
        our outstanding common stock representing approximately 17.32% of the total
        of
        our outstanding shares before the exercise of any outstanding options.
        Accordingly, such persons will be able to exercise substantial control in
        the
        election of our directors, increases in our authorized capital, our dissolution
        or merger, or sale of our assets, and otherwise influence the control of
        our
        affairs. As a result, potential purchasers may not seek to acquire control
        of
        our Company through the purchase of common stock which may tend to reduce
        the
        market price of our common stock. In addition, we are subject to provisions
        of
        the General Corporation Law of the State of Delaware respecting business
        combinations which could, under certain circumstances, also hinder or delay
        a
        change in control.
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Item
      1B. UNRESOLVED STAFF COMMENTS




None.




**Item
      2. PROPERTIES**





We
      lease
      approximately 15,000 square feet of space at One Blue Hill Plaza, Pearl River,
      New York, all of which is currently used for our principal executive offices.
      The lease for such premises was set to expire on July 31, 2006. We entered
      into
      an amendment to the lease on February 2, 2006, extending the lease term for
      five additional years, through October 31, 2011.




We
      own an
      office building in Dieppe, New Brunswick, Canada, acquired in Fiscal 2003,
      which
      houses the operations of our wholly-owed Canadian subsidiary, Infiknowledge,
      ULC. The New Brunswick, Canada property does not carry a mortgage. Additionally,
      we lease approximately 6,000 square feet of space in Lynbrook, New York, which
      is occupied by our wholly-owned subsidiary, Send Traffic.com, Inc. This lease
      expires April 7, 2009. We also lease approximately 2,000 square feet in
      Hicksville, New York, which is occupied by our wholly-owned subsidiary, Hot
      Rocket Marketing, Inc. This lease expires November 30, 2010.




**Item
      3. LEGAL PROCEEDINGS**




**Litigation**




We
      are
      subject to legal proceedings, lawsuits and other claims, brought by:
      (1) consumers of our products and services; (2) our clients;
      (3) consumers of our clients' products and services; and (4) others,
      bringing claims that arise in the normal course of our business. Legal
      proceedings are subject to numerous uncertainties rendering the prediction
      of
      their outcome difficult. As a result of such uncertainty, we are unable to
      estimate the ultimate outcome of any of the subsequently mentioned claims,
      and,
      accordingly, no provision for loss has been recorded. We believe that
      individually, and in the aggregate, the ultimate settlement of the subsequently
      mentioned claims should not have a material adverse effect on our consolidated
      financial position, results of operations or cash flows.




*Qwest*





Qwest
      Communications, Inc. notified the Company of an indemnification claim
      relating to a class action filed against Qwest in Minnesota, *Bindner
      v. LCI International Telecom Corp. et al.* ,
      District Court of Minnesota, County of Sibley, Case No. C0-00-242 (the
“Class Action”). In that action, plaintiffs claimed that from
      September 1998 to July 1999, they were misled when they were solicited
      to change their long distance carrier to Qwest. They asserted that they were
      not
      told that they would have to stay at certain hotels and pay regular rates as
      part of a promotion involving free airline tickets. The Company introduced
      the
      promotion (“Fly Free America”) to Qwest, and was retained by Qwest to operate
      the telemarketing campaign pursuant to an Agreement between Qwest and the
      Company. In or about May 2000, Qwest and the Company entered into an
      agreement terminating the Agreement and settling the amount due the Company
      (the
“May 2000 Agreement”). The Agreement and the May 2000 Agreement
      contained language that Qwest claimed obligated the Company to indemnify Qwest
      for the losses it sustained by reason of this class action. The Company
      maintains that it has no liability in the matter.




Fraud
      claims in the Class Action were dismissed, leaving breach of contract and
      false advertising claims. The court certified the class and Qwest, without
      the
      Company’s consent, agreed to settle the Class Action. The court approved
      the settlement agreement, stated that there was no finding of any liability
      against Qwest, and approved the attorneys’ fees for plaintiffs’ counsel. No
      appeal was taken so that the Class Action has been concluded.




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In
      November 2002, the Company commenced an arbitration against Qwest to
      recover certain amounts held in escrow that were due the Company pursuant to
      the
      May 2000 Agreement. In December 2002, Qwest filed counterclaims in the
      arbitration relating to the Fly Free America program. Qwest asserted that in
      connection with the Class Action, the Company must indemnify it for
      $3.4 million in Qwest attorneys’ fees; $600,000 in fees for counsel to the
      plaintiffs in the Class Action; and $500,000 in settlement payments to
      Class members. Qwest also sought reimbursement of approximately
      $3.1 million it paid the Company pursuant to the May 2000 Agreement.
      Initially, Qwest also sought to recover approximately $1.5 million of fines
      and penalties it claimed it paid to various attorneys general; Qwest has now
      withdrawn that claim.




A
      panel
      of arbitrators was appointed in December 2003. The panel established a
      schedule for substantive motions and for hearings in June 2004. The
      arbitrators also provided for exchanges of information in the arbitration
      subject to Qwest’s right to seek to prevent such exchanges. Qwest moved to
      prevent exchanges of information and this application was granted. Qwest moved
      for summary judgment with respect to its indemnification counterclaim. That
      motion was denied. Arbitration hearings on liability were held during the week
      of June 20, 2005.




In
      late
      October, 2005, the arbitration panel issued an award dismissing with prejudice
      all of Qwest’s claims against the Company, granting the Company’s claim to
      recover the $600,000 escrow plus any accrued interest. The Award has been fully
      implemented.




*Columbia
      House/Rydel*





In
      or
      about August 2002, Columbia House, one of the Company’s clients, notified
      it of an indemnification claim relating to a class action filed against Columbia
      House, among others, in Illinois, *Rydel
      v. Comtrad Industries, Inc. et al.* ,
      Circuit
      Court of Cook County, Illinois, No. 02 CH 13269. In that action, plaintiff
      claims to have received unsolicited commercial e-mail from, among others,
      Columbia House, in violation of Illinois law, and asserts two basic claims
      against Columbia House, one for violation of Illinois’ Consumers Fraud Statute,
      the second for violation of Illinois’ Electronic Mail Act. Columbia House
      advised us that it believes that the email in question was not approved by
      Columbia House when it was sent, and asserted a claim for indemnification
      against the Company pursuant to its contract. The Company and Columbia House
      agreed to defer resolution of the indemnification claim (and reserved each
      of
      their respective rights). Columbia House is defending against the class action.
      Its motion to dismiss was granted as to the Consumer Fraud claim, but denied
      as
      to the Electronic Mail Act claim. The plaintiff has appealed the partial
      dismissal.




In
      or
      about January 2003, the Company was named as a defendant in the *Rydel* class
      action. In an additional count in the complaint, the plaintiff asserted that
      the
      Company violated the Illinois Consumer Fraud and Deceptive Business Practices
      Act by providing to a co-defendant a list of consumers who had consented to
      receive commercial e-mails when, the complaint alleges, they had not. The
      complaint sought injunctive relief and unspecified damages. The Company’s motion
      to dismiss the claim as against it was granted in June 2003, and the
      plaintiff filed an appeal.




In
      late
      2004, the appellate court affirmed the decision below, so that the claim against
      the Company is dismissed; the Consumer Fraud claim against Columbia House is
      dismissed; and the Electronic Mail Act claim against Columbia House remains.
      The
      plaintiff asked the appellate court to reconsider its decision, and the court
      denied that request on April 14, 2005.




*Nasco
      Corporate Finance Consultants, LLC., Todd Cook et al* ***.***





In
      December 2004, the Company filed an action, *Traffix,
      Inc. v. Nasco Corporate Finance Consultants, LLC, Todd Cook et
      al,* Supreme
      Court of the State of New York, County of New York, Index No. 604348/04. In
      the
      action, the Company seeks to recover approximately $600,000, plus interest
      and
      attorneys’ fees, from certain entities and from the principals of such entities,
      for their failure to pay the Company for customer leads which the Company sold
      and delivered to them. The claims include breach of contract, fraud, unjust
      enrichment and piercing the corporate veil. Defendants brought a motion to
      dismiss the complaint, which motion was denied in part by the Court and
      otherwise withdrawn by defendants, except with respect to one of the defendants’
principals against whom the case was dismissed without prejudice, for lack
      of
      personal jurisdiction.




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In
      late
      2005, defendants asserted counterclaims against the Company for, *inter
      alia,* breach
      of
      contract, breach of certain alleged implied warranties, quantum meruit, goods
      sold and delivered, account stated and unjust enrichment, and alleged damages
      of
      $8,000,000. The Company believes that there is no merit to the counterclaims
      and
      intends vigorously to defend against them.




The
      court
      limited discovery and ordered the parties to engage in mediation. A session
      was
      held before the mediator on February 9, 2006, but no settlement was reached.




As
      stated
      above, the Company is unable to determine the ultimate outcomes of any of the
      foregoing claims or demands, and, accordingly, no provision for loss has been
      recorded.




**Item
      4. SUBMISSION OF MATTER TO A VOTE OF
      SECURITYHOLDERS**





A
      Proxy
      statement was mailed on or about August 15, 2005 to our stockholders of record
      as of August 12, 2005 in connection with our 2005 Annual Meeting of
      Stockholders, which was held on September 14, 2005 at our executive offices,
      One
      Blue Hill Plaza, Pearl River, New York. At the meeting, the stockholders voted
      on three matters, all of which were approved.




The
      first
      matter was the election of the members of the Board of Directors. The seven
      directors elected and the tabulation of the votes (both in person and by proxy)
      was as follows:





**Nominees
                For Directors**
            
            **For**
            
            **Against**
            
            **Withheld**Jeffrey
                L Schwartz
            
            9,675,714
            
            1,257,506
            
            -0-Andrew
                Stollman
            
            9,674,011
            
            1,259,209
            
            -0-Murray
                L. Skala
            
            9,615,776
            
            1,317,444
            
            -0-Edwin
                Levy
            
            9,612,922
            
            1,320,298
            
            -0-Lawrence
                Burstein
            
            9,420,173
            
            1,513,047
            
            -0-Mark
                Gutterman
            
            9,422,700
            
            1,510,520
            
            -0-Robert
                Machinist
            
            9,671,833
            
            1,261,387
            
            -0-





There
      were no broker held non-voted shares represented at the Meeting with respect
      to
      this matter.




The
      second matter upon which the stockholders voted was the proposal to ratify
      the
      appointment by the Board of Directors of PricewaterhouseCoopers LLP as our
      independent certified public accountants for 2005. The tabulation of the votes
      (both in person and by proxy) was as follows:




**For**
            
            **Against**
            
            **Abstentions**10,655,084
            
            260,459
            
            17,676





There
      were no broker held non-voted shares represented at the Meeting with respect
      to
      this matter.




The
      third
      matter upon which the stockholders voted was the proposal to amend our Sixth
      Amended and Restated 1996 Employee Incentive Plan, formerly known as the
      Employee Stock Option Plan (the “Sixth Amended Plan”), amending the Fifth
      Amended and Restated 1996 Employee Stock Option Plan to allow for the issuance
      of restricted shares of the Company’s common stock thereunder.




The
      tabulation of the votes (both in person and by proxy) was as
      follows:





**For**
            
            **Against**
            
            **Abstentions**2,765,688
            
            1,738,798
            
            71,081





There
      were 6,357,653 broker held non-voted shares represented at the Meeting with
      respect to this matter.




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            Statements**




**PART
      II**





**Item
      5.****MARKET
      FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





Market
      Information .





Our
      Common Stock trades on the Nasdaq National Market System. Since September 12,
      2000, the date upon which we changed our name from Quintel Communications,
      Inc.
      to Traffix, Inc., our Common Stock has traded under the symbol "TRFX". Prior
      thereto, such Common Stock traded under the symbol "QTEL". The following table
      sets forth the high and low sales prices of the Common Stock as reported by
      Nasdaq for each full quarterly period within the two most recent fiscal
      years.




HIGH
            
            LOWFiscal
                Year Ended November 30, 2005First
                Quarter
            
            $
            7.00
            
            $
            5.59Second
                Quarter
            
            
            5.73
            
            
            4.35Third
                Quarter
            
            
            6.47
            
            
            4.58Fourth
                Quarter
            
            
            6.20
            
            
            5.07Fiscal
                Year Ended November 30, 2004First
                Quarter
            
            $
            6.10
            
            $
            4.78Second
                Quarter
            
            
            7.70
            
            
            4.90Third
                Quarter
            
            
            8.13
            
            
            5.25Fourth
                Quarter
            
            
            7.00
            
            
            4.50





Security
      Holders .





To
      the
      best of our knowledge, at February 24, 2006, there were 92 record
      holders of our Common Stock. We believe there are numerous beneficial owners
      of
      Common Stock whose shares are held in "street name."




Dividends .





We
      have
      paid a dividend of $0.08 per share of our common stock in each of the prior
      eleven fiscal quarters (through and including the fiscal quarter ended November
      30, 2005). The declaration of each of such dividends was approved by our Board
      of Directors upon the conclusion of each quarter. We can give you no assurances
      that our Board will declare any dividends in future fiscal periods. Any further
      declarations will depend upon our performance and other pertinent factors
      relating to our financial position. You should not rely on any prior approvals
      of our Board as an indicator of its intent to approve the declaration of any
      dividends in the future.




15
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            to Table of Contents**
 **Index
            to Financial
            Statements**




**Item
      6.****SELECTED
      FINANCIAL DATA**





The
      following table presents our selected historical financial data of the Company
      for each of the years in the five-year period ended November 30, 2005. The
      financial data set forth should be read in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
      the financial statements of the Company.




**Statement
      of Operations Data** :


**Year
                    Ended November 30,****2005
                    (1)(2)**
                
                **2004
                    (1)(2)**
                
                **2003
                    (2)(3)**
                
                **2002
                    (2)(3)**
                
                **2001
                    (2)(3)(4)**Net
                    revenue
                
                $
                62,856,982
                
                $
                37,281,214
                
                $
                32,388,852
                
                $
                44,042,925
                
                $
                32,209,410Costs
                    of sales
                
                
                41,052,260
                
                
                22,052,610
                
                
                13,080,555
                
                
                12,243,635
                
                
                9,152,462Gross
                    profit
                
                
                21,804,722
                
                
                15,228,604
                
                
                19,308,297
                
                
                31,799,290
                
                
                23,056,948Selling,
                  general and administrative expenses
                
                
                19,927,933
                
                
                15,155,749
                
                
                20,142,448
                
                
                26,724,110
                
                
                15,699,829Bad
                    debt expense (2)
                
                
                (403,186
                )
                
                406,699
                
                
                576,350
                
                
                647,875
                
                
                1,083,826Income
                    (loss) from operations
                
                
                2,279,975
                
                
                (333,844
                )
                
                (1,410,501
                )
                
                4,427,305
                
                
                6,273,293Interest
                    expense
                
                
                —
                
                
                —
                
                
                —
                
                
                (101,385
                )
                
                (5,900
                )Other
                    income, net
                
                
                1,190,819
                
                
                1,752,661
                
                
                1,683,830
                
                
                202,364
                
                
                (2,574,694
                )Income
                    before provision (benefit) for income taxes
                
                
                3,470,794
                
                
                1,418,817
                
                
                273,329
                
                
                4,528,284
                
                
                3,692,699Provision
                    (benefit) for income taxes
                
                
                1,042,637
                
                
                404,603
                
                
                (147,571
                )
                
                1,786,894
                
                
                3,275,200Net
                    income
                
                $
                2,428,157
                
                $
                1,014,214
                
                $
                420,900
                
                $
                2,741,390
                
                $
                417,499Basic
                    net income per share
                
                $
                0.17
                
                $
                0.08
                
                $
                0.03
                
                $
                0.21
                
                $
                0.03Diluted
                    net income per share
                
                $
                0.17
                
                $
                0.07
                
                $
                0.03
                
                $
                0.19
                
                $
                0.03Common
                    Shares outstandingBasic
                
                
                13,973,899
                
                
                13,257,869
                
                
                12,776,295
                
                
                13,350,794
                
                
                14,794,159Diluted
                
                
                14,344,584
                
                
                13,928,375
                
                
                13,085,297
                
                
                14,247,450
                
                
                15,396,619Cash
                    dividends percommon
                    share
                
                $
                0.32
                
                $
                0.32
                
                $
                0.16
                
                $
                —
                
                $
                —


**Balance
                Sheet Data:****Year
                Ended November 30,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**Working
                capital
            
            $
            30,720,637
            
            $
            34,558,222
            
            $
            38,246,883
            
            $
            39,344,095
            
            $
            40,057,164Total
                assets
            
            
            56,262,764
            
            
            51,958,510
            
            
            50,012,944
            
            
            51,190,993
            
            
            52,742,584Total
                liabilities
            
            
            11,421,388
            
            
            8,436,075
            
            
            6,674,031
            
            
            7,404,985
            
            
            10,329,878Stockholders’
                equity
            
            
            44,475,739
            
            
            43,522,435
            
            
            43,338,913
            
            
            43,786,008
            
            
            42,412,706




NOTE:
      Prior year presentations have been changed to conform to fiscal 2005
      presentation; these changes did not impact net income.





(1)
            On
                January 21, 2005, we acquired the assets of Hot Rocket Marketing,
                Inc. and
                Clockwork Advertising Inc. (collectively “Hot Rocket”), privately-held
                corporations in the business of buying and selling performance-based
                on-line advertising space for third parties. Hot Rocket’s net revenues for
                the period January 22, 2005 to November 30, 2005 were approximately
                $7
                million after intercompany
                eliminations.


(2)
            On
                June 30, 2004, we acquired the assets of SendTraffic, Inc. a
                privately-held search engine optimization company. SendTraffic’s net
                revenues for the year ended November 30, 2005 and for the five months
                ended November 30, 2004 were approximately $9.6 million and $2.1
                million
                after intercompany eliminations,
                respectively.


(3)
            Effective
                September 1, 2001, our financial statements included Montvale Management,
                LLC as a consolidated majority-owned subsidiary, which subsidiary
                was
                disposed of in Fiscal 2003. See Note 2 to the Consolidated Financial
                Statements.


(4)
            Basic
                and diluted earnings per share would not have been affected in the
                fiscal
                year ending November 30, 2001, pursuant to the adoption regarding
                the
                accounting change for intangible assets made in Fiscal
                2002.






16
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            to Table of Contents**
 **Index
            to Financial
            Statements**


**Item
      7.****MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





The
      matters discussed in the following Management's Discussion and Analysis of
      Financial Condition and Results of Operations may contain forward-looking
      statements and information relating to our Company that are based on the
      current beliefs and expectations of Management, as well as assumptions made
      by
      and information currently available to us. When used in this Management's
      Discussion and Analysis, and elsewhere in this Form 10-K, the words
      "anticipate", "believe", "estimate", and "expect" and similar expressions,
      as
      they relate to our Company are intended to identify forward-looking statements.
      Such statements reflect the current views of our Company's management, with
      respect to future events and are subject to certain risks, uncertainties and
      assumptions, which could cause the actual results to differ materially from
      those reflected in the forward-looking statements.




The
      following discussion should be read in conjunction with the consolidated
      financial statements and the related notes thereto, as well as all other related
      notes, and financial and operational references, appearing elsewhere in this
      document.




**Overview**
 
 We
          are a
          leading Internet media and marketing company that provides complete end-to-end
          marketing solutions for our clients, which include advertisers, direct
          marketers, and agencies, seeking to increase sales and customer contact
          through
          on-line marketing channels. The services we offer include the development
          of a
          complete creative promotion used to market our client's product and/or
          service
          to consumers online. In the provision of our client services we use all
          major
          online marketing channels, including email promotions to generate new customers
          for our clients; the delivery of data files indicating the results of the
          email
          promotions; the creation and hosting of customized websites and/or web
          pages to
          facilitate consumer transactions for our clients; generating comprehensive
          reporting of website activity allowing our clients to analyze the effectiveness
          of the promotion; and providing revenue generating potential for our clients
          through affiliate marketing opportunities. We use this media platform to
          generate customers, sales and leads for our own service offers, in addition
          to
          our clients. We generate revenue for our clients primarily on a
          performance-based model, under which we record revenue upon the successful
          delivery to our client of a qualifying lead, customer, survey, completed
          application or ultimate sale.
  We
          also
          generate revenue directly from consumers through our “direct-to-consumer”
business, which includes Internet based services, such as (a) iMatchUp.com,
          our
          on-line dating service included in our E-commerce segment; and (b) other
          service
          offers that comprise our LEC Billed Products segment. Our on-line dating
          service
          continues to be marketed. We discontinued new customer acquisitions of
          our LEC
          Billed products in Fiscal 2004, but we continue to actively seek out other
          LEC
          services that exhibit the potential for acceptable economic returns. The
          LEC
          Billed Products do not have any long-lived assets associated with the segment.
          These “direct-to-consumer” services generated approximately $9.5 million, or 15%
          of our revenue during the fiscal year ended November 30, 2005, as compared
          to
          approximately $8.9 million, or 24% of our revenue during the fiscal year
          ended
          November 30, 2004, and $5.5 million, or 17% of our revenue during the fiscal
          year ended November 30, 2003.
  We
          made
          one asset acquisition in each of Fiscal 2004 and 2005. These asset acquisitions
          accounted for approximately $16.6 million of E-commerce segment revenue,
          or
          approximately 26% of consolidated Fiscal 2005 revenues. Such asset acquisitions
          are described in more detail below, and further described in the notes
          to the
          November 30, 2005 consolidated financial statements included
          herein.
  We
          also
          generate revenues from the sales, rentals and management (for use both
          on-line
          and off-line) of our proprietary, profiled databases, which revenue is
          included
          in our E-commerce segment.
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              to Table of Contents**
 **Index
              to Financial
              Statements**
 **On-Line
          Marketing**
 
 We
          own
          and operate a variety of Internet websites featuring specialized content
          such as
          on-line dating, downloadable music, recipes, greeting cards, automobile
          information, DVD promotions, and other theme-based content. We generate
          traffic
          to our websites from advertising on third party Internet media (i.e., search
          engines, email and banner advertisements) and through cross-marketing within
          our
          own on-line media. Our Web properties and our marketing activities are
          designed
          to generate real-time response-based marketing results for our corporate
          clients. When visiting our on-line properties, consumers are given the
          opportunity to purchase, sign-up for, ask to be contacted regarding, or
          simply
          indicate an interest in, hundreds of offers for various products and services.
          Specifically, through these interactive Web properties we generate a variety
          of
          transactional results ranging from (a) Web traffic, (b) inbound telemarketing
          calls, (c) outbound telemarketing leads, (d) demographically/psychographically
          profiled lists of consumers, (e) highly-targeted customized response-based
          leads, (f) completed applications for products, and (g) sales of products
          and
          services.
 *Websites.* We
            own
            and operate a variety of websites with a broad range of content. Virtually
            all
            of our websites generate revenue from client advertisements. The advertisements
            are served across all of our websites using our internally-developed
            technology
            that serves ads to website visitors using an algorithm that takes into
            account a
            number of factors including information supplied by the visitor upon
            registration (e.g., gender, age, zip code), as well as the price paid
            by our
            customer to serve the advertisement.
  The
            websites feature content ranging from music for downloads to sweepstakes
            offers.
            We launched EZ-Tracks.com in Fiscal 2004, a site that features over 30,000
            songs
            available for free and legal downloading, as well as other content such
            as
            musical greeting cards and a downloadable version of the Bible in audio
            format.
            We have a games website that offers a variety of free parlor-style games,
            such
            as backgammon and checkers. In Fiscal 2004 we also launched reciperewards.com,
            a
            website that features thousands of cooking recipes.
  Our
            PrizeDistributors, Inc. sponsored group of websites offers consumers
            the
            opportunity to win up to $1 million daily in our free, on-line sweepstakes.
            The
            sweepstakes prizes are indemnified by an independent, third-party agency.
            In
            order to play, each consumer must provide complete and accurate registration
            information and agree to receive ("opt-in") marketing messages from us
            and our
            marketing partners and affiliates.
  We
            own
            and operate several other websites such as Music of Faith.com,
            AtlasCreditGroup.com, TheBargainSpot.com, AltasAutomotiveGroup.com,
            EZGreets.com, GameFiesta.com, PrizeAmerica.com and LoveFreeGames.com.
            Each of
            these sites is designed to appeal to a specific consumer interest category
            that
            we matched with client promotions that appeal to such interest category.
  *Email
            Marketing.* Each
            program that we market for our clients can be implemented not only through
            our
            websites, but also, and often, through email marketing. We currently
            market to a
            vast database, which includes consumer data that is either owned by us
            or is
            managed by us under our revenue share arrangements, whereby we recognize
            the
            gross revenue as earned and bear the payment obligation to the list owner,
            irrespective of receipt of payment from our clients.
  *Results
            Analysis.* Subsequent to a campaign being fully implemented, we continually analyze
            the
            marketing results to gauge whether the campaigns are continuing to generate
            an
            adequate result for the client, whether the media is being utilized
            cost-efficiently, and to determine whether new and different copy is
            yielding
            better overall results. These are traditional direct-marketing disciplines
            that
            we apply and that we believe distinguish us from many of our competitors
            in the
            on-line marketing industry.
  *Affiliate
            Marketing.* Our
            affiliate marketing business commenced in late Fiscal 2005 under the
            name of
            RocketProfit.com. We have created an affiliate destination where publishers
            and
            advertisers can make available to themselves our unique and exclusive
            deals,
            customized promotions, high payouts, detailed tracking capabilities,
            and
            significant multi-level customer support.
 *Syndication.* After we
          develop a campaign that works efficiently on our own media, we sometimes
          "syndicate" the program to third-party media. Typically, we have expended
          time,
          media and other costs in developing certain campaigns. In exchange for
          this
          invested effort, we obtain the right to market those campaigns to other
          on-line
          media companies. We believe that with syndicated offers we can leverage
          campaigns we have developed so that in future fiscal periods we can generate
          additional revenue with reduced costs and risks associated with such business
          extension.
 18
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              to Table of Contents**
 **Index
              to Financial
              Statements**
 **OTHER
            SERVICES**
 
 We
            introduced several new business units during the past three fiscal years,
            and
            continued to expand a portion of these new business units in Fiscal 2005,
            specifically our on-line dating program conducted over the Internet
            ("iMatchup.com") which is included in our E-commerce segment. These new
            business
            units are designed as monthly recurring billing programs, such as a membership
            to iMatchUp.com. Revenue from these businesses is generated by directly
            billing
            consumers. Our on-line dating business became a significant source of
            our
            revenue in Fiscal 2004 and continued into Fiscal 2005, generating approximately
            13% and 18% of our consolidated revenue for Fiscal 2005 and 2004, respectively.
  Our
            expansion in, and dependence on, our on-line direct marketing efforts,
            coupled
            with the potential for state and/or federal legislation limiting our
            ability to
            contact consumers on-line should all be considered when referring to
            our current
            fiscal year’s results, as well as prior year’s historical results, in evaluating
            the potential for our future operations, cash flows, and financial
            position.
  **Background**
 
 From
            our
            inception in 1993 (under the name "Quintel Communications, Inc.") through
            1999,
            we generated the bulk of our revenue from direct marketing using the
            traditional
            media of television, postal mail and telemarketing. In 2000, we repositioned
            our
            direct marketing business to the on-line media of the Web. Applying the
            marketing disciplines honed from our years of operating in the "off-line"
            media
            arena, we have been able to provide enhanced response-based results in
            a
            cost-effective and scaleable manner via on-line marketing. During December
            1995
            we completed our initial public offering of common stock, which is publicly
            traded and is reported on the NASDAQ National Market under the symbol
“TRFX”.


**Transactions
      with Major Customers**





Transactions
      with major customers and related economic dependence information is set forth
      (1) following our discussion of Liquidity and Capital Resources, (2) in our
      discussion of Critical Accounting Policy and Accounting Estimates Discussion
      (immediately following {1} previously mentioned) and (3) under the heading
      “Transactions with Major Customers” in Note 1 to the Consolidated Financial
      Statements referred to in the Financial Statements and Supplementary Data
      section hereof and incorporated herein by reference.




**BASIS
      OF PRESENTATION**





Certain
      amounts for the prior periods that are presented in the accompanying
      consolidated financial statements and referred to in the discussions below,
      have
      been reclassified in order to conform to the current period
      presentation.




**Segment
        Information**
 
 During
        the fiscal year ended November 30, 2005, we generated revenue from the following
        segments: E-Commerce and LEC Billed products. The E-Commerce segment currently
        represents the core of our business operations. Revenue in the E-commerce
        segment is generated primarily from marketing of third party products and
        services on our websites, through email and search engine marketing campaigns,
        and from sales of memberships to our on-line dating service. LEC Billed products
        consist of our proprietary LEC billed products which were principally
        reintroduced during the fiscal year ended November 30, 2003. We discontinued
        new
        customer acquisitions for this segment during the latter part of the fiscal
        year
        ended November 30, 2004, and any revenues attributable to it are generated
        from
        a declining base of customers acquired in prior fiscal years.
  Historically,
        our now discontinued Off-Line Marketing service segment's activities consisted
        of telemarketing services used for the acquisition of long distance and wireless
        phone customers for various phone service providers; however during the fiscal
        years ended November 30, 2002 and 2003, this segment consisted exclusively
        of
        our majority owned subsidiary, Montvale Management, LLC and the revenues
        and
        expenses of Montvale's net branch services provided to qualified mortgage
        banking and lending institutions. During the fiscal year ended November 30,
        2003
        (specifically, March 2003), we disposed of our interest in Montvale, all
        as more
        fully described in Note 2 included in the attached financial
        statements.





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            to Financial
            Statements**




Segment
        information is set forth in Note 14 to the Consolidated Financial Statements
        referred to in the Financial Statements and Supplementary Data section hereof.
        For a more detailed discussion of our segment information, also see
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations”.




RESULTS
      OF OPERATIONS





Our
      net
      revenues, on a segmental basis, and with disclosure of the components of the
      individual segments, for each of the fiscal years ended November 30, 2005,
      2004
      and 2003, are set forth in the following tables:




**Segment
                Data - Net Revenues, by segment component****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **2003****E-commerce
                components**iMatchUp.com
                dating sites
            
            $
            8,432,402
            
            $
            6,606,541
            
            $
            3,946,442Website
                advertising
            
            
            24,631,577
            
            
            17,311,744
            
            
            11,970,259Net
                branch commission fees
            
            
            —
            
            
            —
            
            
            355,981Search
                Engine Marketing revenues
            
            
            9,599,746
            
            
            2,059,722
            
            
            —Internet
                Advertising Agency revenues
            
            
            7,029,914
            
            
            —
            
            
            —Email
                marketing programs
            
            
            7,702,429
            
            
            6,308,914
            
            
            8,460,131Data
                sales and rentals
            
            
            1,295,013
            
            
            1,454,599
            
            
            2,031,973Sales
                of jewelry and gifts
            
            
            53,525
            
            
            190,434
            
            
            925,897Internet
                game development and other
            
            
            3,092,085
            
            
            1,047,269
            
            
            1,108,874**Total
                E-commerce**
            
            $
            61,836,691
            
            $
            34,979,223
            
            $
            28,799,557**Off-line
                Marketing Service components**Net
                branch commission fees
            
            $
            —
            
            $
            —
            
            $
            2,017,225**Total
                Off-line Marketing Services**
            
            $
            —
            
            $
            —
            
            $
            2,017,225**LEC
                Billed Products and Services components**Click-Help,
                WWA and TXNet LEC Products
            
            $
            1,020,291
            
            $
            2,301,991
            
            $
            1,572,070**Total
                LEC Billed Products and Services**
            
            $
            1,020,291
            
            $
            2,301,991
            
            $
            1,572,070**CONSOLIDATED
                TOTALS**
            
            $
            62,856,982
            
            $
            37,281,214
            
            $
            32,388,852





The
      following table sets forth for the periods indicated the percentage of net
      revenues represented by the certain items reflected in our statement of
      operations:




For
                the Year Ended November 30,2005
            
            2004
            
            2003Net
                Revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of Sales
            
            
            65.3
            %
            
            59.2
            %
            
            40.4
            %Gross
                Profit
            
            
            34.7
            %
            
            40.8
            %
            
            59.6
            %Selling,
                general and administrative expenses
            
            
            31.7
            %
            
            40.7
            %
            
            62.2
            %Bad
                debt - net (recapture) expense
            
            
            -0.6
            %
            
            1.1
            %
            
            1.8
            %Other
                Income (expense)
            
            
            1.9
            %
            
            4.7
            %
            
            5.2
            %Net
                income
            
            
            3.9
            %
            
            2.7
            %
            
            1.3
            %






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            to Table of Contents**
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            to Financial
            Statements**




**For
      the Year Ended November 30, 2005 Compared to Year Ended November 30,
      2004**





Our
      net
      revenues, on a segmental basis, and with disclosure of the components of the
      individual segments, for each of the fiscal years ended November 30, 2005 and
      2004, are detailed in the following tables:




**Segment
                Data - Net Revenues, by Segment Component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%****E-commerce
                components**iMatchUp.com
                dating sites
            
            $
            8,432,402
            
            $
            6,606,541
            
            $
            1,825,861
            
            
            28
            %Website
                advertising
            
            
            24,631,577
            
            
            17,311,744
            
            
            7,319,833
            
            
            42
            %Search
                Engine Marketing revenues
            
            
            9,599,746
            
            
            2,059,722
            
            
            7,540,024
            
            
            366
            %Internet
                Advertising Agency revenue
            
            
            7,029,914
            
            
            —
            
            
            7,029,914
            
            
            100
            %Email
                marketing programs
            
            
            7,702,429
            
            
            6,308,914
            
            
            1,393,515
            
            
            22
            %Data
                sales and rentals
            
            
            1,295,013
            
            
            1,454,599
            
            
            (159,586
            )
            
            -11
            %Sales
                of jewelry and gifts
            
            
            53,525
            
            
            190,434
            
            
            (136,909
            )
            
            -72
            %Internet
                game development and other
            
            
            3,092,085
            
            
            1,047,269
            
            
            2,044,816
            
            
            195
            %**Total
                E-commerce**
            
            
            61,836,691
            
            
            34,979,223
            
            
            26,857,468
            
            
            77
            %**LEC
                Billed Products and Services components**Click-Help,
                WWA, and TXNet LEC Products
            
            
            1,020,291
            
            
            2,301,991
            
            
            (1,281,700
            )
            
            -56
            %**Total
                LEC Billed Products and Services**
            
            
            1,020,291
            
            
            2,301,991
            
            
            (1,281,700
            )
            
            -56
            %**TOTAL
                CONSOLIDATED NET REVENUE**
            
            $
            62,856,982
            
            $
            37,281,214
            
            $
            25,575,768
            
            
            69
            %





Net
      Revenue increased approximately $25.6 million, or 69%, to $62.9 million for
      the
      year ended November 30, 2005, from $37.3 million in the prior year. The
      E-commerce segment’s core business grew organically, primarily driven by an
      extension in our customer base across the majority of our revenue components,
      coupled with revenues generated from a prior year acquisition, which accounted
      for approximately $19.8 million of the consolidated revenue increase.
      Supplementing the core E-commerce revenue growth was approximately $7.0 million
      in revenue earned from our January 21, 2005 Hot Rocket acquisition. Internet
      game development and other E-commerce revenue is comprised of: (1) revenue
      generated from Internet game development and associated royalty revenue of
      $0.6
      million and $0.2 million in Fiscal 2005 and 2004, respectively, with the $0.4
      million, or 168% increase attributable to a successful game introduced in early
      Fiscal 2005; and (2) list management revenue, whereby we allow selected vendors
      to market their offers to our database in consideration for a share of the
      revenues earned (usually 50% of such revenues) which amounted to $2.4 million
      and $0.8 million in Fiscal 2005 and 2004, respectively, with the $1.6 million,
      or 203% increase attributable to a full Fiscal 2005 deployment of such activity
      over a wider range of vendors when compared to a partial 2004 fiscal deployment
      over a limited range of vendors. The total E-commerce segment revenue increase
      of $26.9 million was offset by a decline in LEC Billed Product revenue of
      approximately $1.3 million attributable to our Fiscal 2004 cessation of
      marketing activities in our LEC business. All intersegment sale activity is
      eliminated from disclosed revenues.




21
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            to Financial
            Statements**




Our
      cost
      of sales during the years ended November 30, 2005 and 2004, were comprised
      of
      (1) direct and indirect marketing costs associated with the
      acquisition  and
      retention of consumers for our marketing programs, including direct response
      email marketing costs, website registrations, customer profiles, other customer
      acquisition costs, search engine marketing costs, and promotional and creative
      costs, and (2) the related contingent-based sweepstakes indemnification expense,
      billing and collection fees and customer service costs.




Our
      cost
      of sales, on a segmental basis, and with disclosure of the components of the
      individual segments, for each of the years ended November 30, 2005 and 2004,
      are
      set forth below:




**Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****Year
              Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%****E-commerce****Advertising,
                promotion and fulfillment costs**Email
                marketing and related delivery costs
            
            $
            4,852,513
            
            $
            4,085,746
            
            $
            766,767
            
            
            19
            %Website
                  registrations, customer profiles, search andall other
                  related customer acquisition costs
            
            
            30,674,102
            
            
            15,030,827
            
            
            15,643,275
            
            
            104
            %Promotional,
                creative and other costs
            
            
            385,584
            
            
            343,494
            
            
            42,090
            
            
            12
            %Purchases
                of on-line advertising space
            
            
            4,352,961
            
            
            —
            
            
            4,352,961
            
            
            100
            %**Total
                E-commerce Advertising**
            
            
            40,265,160
            
            
            19,460,067
            
            
            20,805,093
            
            
            107
            %**Service
                Bureau fees**Contingent
                based prize indemnification costs
            
            
            179,301
            
            
            300,278
            
            
            (120,977
            )
            
            -40
            %**Total
                E-commerce Cost of Sales**
            
            
            40,444,461
            
            
            19,760,345
            
            
            20,684,116
            
            
            105
            %**LEC
                Billed Products and Services****Service
                Bureau fees**Service
                provision, billing and collection fees
            
            
            607,799
            
            
            2,292,265
            
            
            (1,684,466
            )
            
            -73
            %**Total
                LEC Billed Cost of Sales**
            
            
            607,799
            
            
            2,292,265
            
            
            (1,684,466
            )
            
            -73
            %**Consolidated
                Cost of Sales**
            
            $
            41,052,260
            
            $
            22,052,610
            
            $
            18,999,650
            
            
            86
            %





Cost
      of
      sales on a consolidated basis increased $19.0 million, or 86%, to $41 million
      for the year ended November 30, 2005 from $22.1 million for the year ended
      November 30, 2004.




The
      primary factor contributing to the increase in consolidated cost of sales was
      related to a net increase of approximately $20.6 million in costs incurred
      by
      our E-commerce segment in the generation of its increased revenues. The
      E-commerce segment recognized an increase of $15.6 million in its media
      purchases, which included website registrations, customer profiles, search
      engine costs and all other core on-line customer procurement costs. We have
      adjusted our marketing emphasis to be more reliant on revenue generation
      resulting from search traffic media, and, accordingly, incurred approximately
      $17.4 million on such marketing expenditures during Fiscal 2005, as compared
      to
      $1.4 million in similar expenditures during Fiscal 2004. During the period
      January 21, 2005 to November 30, 2005, cost of revenue also included
      approximately $4.4 million in direct purchases of on-line advertising space,
      which is resold on a performance basis by our Hot Rocket subsidiary, which
      was
      acquired on January 21, 2005. Fiscal 2004 did not have a comparable
      cost.




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The
      E-commerce segment increase in the cost of sales further resulted from an
      increase of $0.8 million, or 19% increase, in email marketing costs (which
      includes certain operating costs necessary to handle the email operations of
      our
      Infiknowledge subsidiary) to promote the segment’s revenue generating
      opportunities directly related to email promotions and to cause potential (as
      well as repeat) customers to visit (and re-visit in the case of repeat
      customers) our websites, and, once there, to register and become customer
      profiles available to be marketed existing offers, and future promotions,
      currently and in future fiscal periods. See “-Consolidated Gross Profit, by
      Segment” for a discussion of anticipated future gross margin recognition as a
      result of current period costs incurred.




The
      cost
      of sales related to our LEC Billed Product segment declined approximately $1.7
      million, or 73%, when compared to the prior year. LEC costs are principally
      comprised of billing, collection and customer service costs. We terminated
      our
      marketing efforts and expenditures during Fiscal 2004 regarding acquisition
      of
      new LEC customers, which is the reason for the comparative period decline in
      LEC
      Billed Product segment cost of revenues.




Our
      gross
      profit in terms of dollars, on a segmental basis, and our gross profit
      percentage, on a segmental basis, for each of the years ended November 30,
      2005
      and 2004, are set forth below:




**Consolidated
                Gross Profit, by Segment****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%**E-commerce
            
            $
            21,392,232
            
            $
            15,218,878
            
            $
            6,173,354
            
            
            41
            %LEC
                Billed products and services
            
            
            412,490
            
            
            9,726
            
            
            402,764
            
            
            4141
            %**CONSOLIDATED
                TOTALS**
            
            $
            21,804,722
            
            $
            15,228,604
            
            $
            6,576,118
            
            
            43
            %





**Consolidated
                Gross Profit Percentages, by segment****Absolute**
            
            **Relative****percentage**
            
            **percentage****change**
            
            **change****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **inc(dec)**
            
            **inc(dec)**E-commerce
            
            
            34.6
            %
            
            43.5
            %
            
            -8.9
            %
            
            -20.5
            %LEC
                Billed products and services
            
            
            40.4
            %
            
            0.4
            %
            
            40.0
            %
            
            9468.8
            %**CONSOLIDATED
                GROSS PROFIT PERCENTAGE**
            
            
            34.7
            %
            
            40.8
            %
            
            -6.2
            %
            
            -15.1
            %





Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 34.7% during
      the year ended November 30, 2005, compared to 40.8% in the prior year,
      representing an absolute percentage point decrease of 6.2%, or a 15.1% decrease
      on a relative basis.




The
      decline in gross profit percentage is primarily attributable to three factors:




(1)
            The
                impact on gross margin from significant increases in search engine
                marketing expenditures and other third-party online customer costs
                for our
                websites, with all such costs being charged to operations when incurred,
                with such outlays generating revenue in current and future fiscal
                periods.
                Furthermore margin earned on search generated media is less than
                that
                which was generated from our sweepstakes based media. Search generated
                media occupied approximately 57% of our total Fiscal 2005 E-commerce
                media
                spent compared to 9% of our E-commerce media spent during Fiscal
                2004.




(2)
            The
                impact on gross profit from iMatchUp.com from our expensing of customer
                acquisition costs during the period we acquire a free iMatchUp.com
                membership account, while the recognition of the revenue is dependent
                upon
                whether or not the free account converts to a paying membership.
                The
                period that a free account may convert to a billable account ranges
                from
                one week after acquisition, to as long as two years, after its
                initial month of acquisition, based on available historical conversion
                to
                billable experience. The costs of acquiring free memberships has
                risen in
                Fiscal 2005 approximately three fold, and that conversion rates regarding
                first-time conversion and renewal billing retention have both declined
                during Fiscal 2005, with both factors having a negative impact on
                the
                future growth potential and the future fiscal period profit generating
                potential of our dating sites. We believe that the primary cause
                for the
                cost increase results from the market conditions regarding competition;
                where our competitors continue to increase the cost that they accept
                to
                pay for new member data.




(3)
            The
                impact on gross margin, although to a lesser degree than (1) and
                (2)
                above, resulting from our shift in resource allocation in response
                to
                regulatory changes, whereby we migrated a portion of our marketing
                efforts
                from higher margin email revenue to lower margin search traffic generated
                revenue. Email revenue increased $1.3 million, or 22% in Fiscal 2005,
                but
                comprised only 12% of Fiscal 2005 consolidated revenues compared
                to 17% of
                Fiscal 2004 consolidated revenues.




23
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 **Index
            to Financial
            Statements**




Our
      Selling Expenses for each of the years ended November 30, 2005 and 2004 are
      presented, on a segmental basis, and with the components of the individual
      segments, in the tables set forth below:




**Segment
                Data - Consolidated Selling Expenses, by segment, by
                component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%****E-commerce**Fee
                share commissions
            
            $
            2,426,527
            
            $
            1,190,894
            
            $
            1,235,633
            
            
            104
            %Selling
                salaries and related expenses
            
            
            1,400,723
            
            
            878,034
            
            
            522,689
            
            
            60
            %Travel
                and entertainment
            
            
            189,353
            
            
            254,582
            
            
            (65,229
            )
            
            -26
            %**TOTAL
                Selling - E-commerce segment**
            
            
            4,016,603
            
            
            2,323,510
            
            
            1,693,093
            
            
            73
            %**Consolidated
                Totals**
            
            $
            4,016,603
            
            $
            2,323,510
            
            $
            1,693,093
            
            
            73
            %





Selling
      expenses, on a consolidated basis, increased approximately $1.7 million, or
      73%,
      from $2.3 million during the year ended November 30, 2004 to $4.0 million during
      the year ended November 30, 2005. The increase resulted from (a) an approximate
      $1.2 million increase in fee share commissions that correlates to our increased
      email revenue derived from the use of third-party databases in the generation
      of
      such revenues, whereby, we are the primary obligor to the list owner and bear
      the responsibility of payment to the list owner regardless of whether our client
      pays us; and (b) an approximate $0.5 million increase in selling salaries,
      with
      such increase relating partially to the expansion of our sales force, coupled
      with increased sales commissions expense resulting from our increased
      revenue.




Our
      general and administrative expenses ("G&A") are principally comprised of (i)
      compensation costs and related expenses for executive, finance, information
      technology and operation systems, and general administration personnel, (ii)
      professional fees (which include legal; audit, accounting and tax;
      Sarbanes-Oxley compliance costs; public relations; database management and
      consulting; and public company related printing and filing costs), (iii)
      insurance costs, (iv) occupancy and other equipment rental costs, (v) site
      development, maintenance and modification costs related to our various active
      segments, and (vi) all other general and miscellaneous corporate expense items,
      including depreciation and amortization not allocated to cost of
      sales.




Our
      General and Administrative Expenses for the years ended November 30, 2005 and
      2004 are presented, on a segmental basis, and with the components of the
      individual segments, in the tables set forth below:




**Consolidated
                General and Administrative Expenses, by segment, by
                component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%****E-commerce**Compensation
                costs and related expenses
            
            $
            6,884,834
            
            $
            4,588,573
            
            $
            2,296,261
            
            
            50
            %Professional
                fees
            
            
            807,379
            
            
            730,850
            
            
            76,529
            
            
            10
            %Insurance
                costs
            
            
            470,470
            
            
            539,372
            
            
            (68,902
            )
            
            -13
            %Occupancy
                and equipment costs
            
            
            399,482
            
            
            296,494
            
            
            102,988
            
            
            35
            %Site
                development, maintenance andmodifications
            
            
            1,361,523
            
            
            1,405,484
            
            
            (43,961
            )
            
            -3
            %All
                other G&A expenses
            
            
            2,334,409
            
            
            1,325,458
            
            
            1,008,951
            
            
            76
            %**TOTAL
                G&A - E-commerce segment**
            
            
            12,258,097
            
            
            8,886,231
            
            
            3,371,866
            
            
            38
            %**LEC
                Billed Products and Services**Compensation
                costs and related expenses
            
            
            57,250
            
            
            311,250
            
            
            (254,000
            )
            
            -82
            %Professional
                fees
            
            
            17,143
            
            
            97,997
            
            
            (80,854
            )
            
            -83
            %Insurance
                costs
            
            
            9,111
            
            
            52,623
            
            
            (43,512
            )
            
            -83
            %All
                other G&A expenses
            
            
            10,223
            
            
            29,071
            
            
            (18,848
            )
            
            -65
            %**TOTAL
                G&A - LEC segment**
            
            
            93,727
            
            
            490,941
            
            
            (397,214
            )
            
            -81
            %**Corporate**Compensation
                costs and related expenses
            
            
            1,772,111
            
            
            1,547,134
            
            
            224,977
            
            
            15
            %Professional
                fees
            
            
            840,020
            
            
            881,977
            
            
            (41,957
            )
            
            -5
            %Insurance
                costs
            
            
            446,440
            
            
            473,608
            
            
            (27,168
            )
            
            -6
            %All
                other G&A expenses
            
            
            500,935
            
            
            552,348
            
            
            (51,413
            )
            
            -9
            %**TOTAL
                G&A - Corporate**
            
            
            3,559,506
            
            
            3,455,067
            
            
            104,439
            
            
            3
            %**Consolidated
                Totals**
            
            $
            15,911,330
            
            $
            12,832,239
            
            $
            3,079,091
            
            
            24
            %






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 **Index
            to Financial
            Statements**




General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $3.1 million, or 24%, when comparing G&A of $15.9 million for
      the year ended November 30, 2005 to G&A of $12.8 million incurred during the
      year ended November 30, 2004. The net increase was attributable to an increase
      in E-commerce segment ($3.4 million) and an increase in Corporate ($0.1
      million), offset by a decline in the LEC Billed Product segment ($0.4 million).
      The significant increase in E-commerce expenses was attributable to the
      operating overhead incurred from our two recently acquired subsidiaries. In
      combination, such subsidiaries’ overhead amounted to approximately $4.3 million
      during the year ended November 30, 2005 compared to approximately $0.7 million
      during the prior year. Specifically, during the year ended November 30, 2005,
      the subsidiaries’ combined compensation costs and related expenses amounted to
      approximately $2.7 million, which accounts for approximately 63% of the $4.3
      million increase. The balance of $1.6 million is attributable to $1.0 million
      in
      amortization expense resulting from the amortization of identifiable intangibles
      acquired in the acquisitions, with the balance of approximately $0.6 million
      attributable to rent, insurance, telephone and other general and administrative
      expenses.




Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. We incurred approximately $0.87 million in legal fees (exclusive
      of
      disbursements) from FKIWSBR during the year ended November 30, 2005, of which
      $0.70 million was expensed, and $0.17 million was capitalized in the Hot Rocket
      acquisition. The $0.70 million of FKIWSBR expense was then reduced by $0.36
      million, representing amounts recovered from our insurance providers under
      the
      terms of their respective coverage provisions. We incurred approximately $0.3
      million in legal fees (exclusive of disbursements) from FKIWSBR during the
      year
      ended November 30, 2004.




**Consolidated
                Bad Debt Expense, by Segment****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%**E-commerce
            
            $
            (403,186
            )
            $
            406,699
            
            $
            (809,885
            )
            
            -199
            %**Consolidated
                Totals**
            
            $
            (403,186
            )
            $
            406,699
            
            $
            (809,885
            )
            
            -199
            %





Bad
      Debt
      expense decreased approximately $0.8, or 199%, to a net bad debt recapture
      of
      $0.4 million in the year ended November 30, 2005, as compared to bad debt
      expense of $0.4 million incurred in the year ended November 30, 2004.




During
      the year ended November 30, 2005, we settled a dispute with Qwest Communications
      International Inc., where, in accordance with the arbitration settlement, Qwest
      was required to pay us $600,000, plus interest. Such amount represented revenue
      earned in fiscal years dating back to the inception of our E-commerce activities
      in Fiscal 2000, the year in which the agreement was wrongfully terminated,
      and
      the year we commenced the arbitration. During Fiscal 2000, we had not recorded
      the $600,000 of revenue based on the questionable nature of its receipt pursuant
      to the final arbitration decision, effectively recording bad debt expense in
      that year. Upon the Fiscal 2005 settlement of the arbitration in our favor,
      we
      recorded the receipt as a bad debt recapture in accordance with the original
      recording in Fiscal 2000. Offsetting this bad debt recapture was approximately
      $197,000 in net increases in our reserves for smaller accounts. Our allowance
      for bad debts results from our assessment of the risk of collection embedded
      in
      our customer base as described below.




25
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            Statements**




We
      continuously evaluate the potential of the collectibility of trade receivables
      by reviewing such factors as deterioration in the operating results, financial
      condition or bankruptcy filings of our customers. Not all of our customers
      are
      publicly traded, or otherwise make available financial information. Therefore
      there are limits placed on our ability to draw information from financial
      filings. As a result of our review process, we record adjustments to bad debt
      provisions/(recaptures) to reflect the related accounts receivable carrying
      amount to amounts that estimate their probable realizable value. Provisions
      for
      bad debts are also recorded resulting from the review of other factors,
      including (a) length of time the accounts receivable are past due and (b)
      historical experience and other factors obtained during collection efforts.
      If
      circumstances related to specific customers change, our estimates for bad debt
      provision/(recaptures) could be further increased or decreased in future fiscal
      periods.




**OTHER
      INCOME (EXPENSE)**





The
      components of our "Other income (expense)" for the years ended November 30,
      2005
      and 2004 are set forth below:




**Change**
            
            **change****inc(dec)**
            
            **inc(dec)****Year
                Ended November 30,**
            
            **2005**
            
            **2004**
            
            **$$$**
            
            **%%%**Other
                income (expense):Interest
                income and dividends
            
            $
            957,069
            
            $
            544,153
            
            $
            412,916
            
            
            76
            %Realized
                gains on sale of marketable securities
            
            
            561,359
            
            
            25,490
            
            
            535,869
            
            
            2102
            %Realized
                gain on sale of subsidiary
            
            
            195,000
            
            
            784,900
            
            
            (589,900
            )
            
            -75
            %Other
                non-operating income:Other
                miscellaneous income(expense)
            
            
            (6,832
            )
            
            104,311
            
            
            (111,143
            )
            
            -107
            %Vendor
                settlement on prior year marketing fee
            
            
            —
            
            
            350,000
            
            
            (350,000
            )
            
            -100
            %Foreign
                Currency Exchange Rate Fees and interest
            
            
            (21,244
            )
            
            (20,793
            )
            
            (451
            )
            
            2
            %Interest
                and penalties - tax audits and settlements
            
            
            —
            
            
            (69,581
            )
            
            69,581
            
            
            100
            %Reduction
                of prior year's LEC reserve
            
            
            —
            
            
            34,181
            
            
            (34,181
            )
            
            100
            %Minority
                interest (income) loss
            
            
            (494,533
            )
            
            —
            
            
            (494,533
            )
            
            100
            %Total
                Consolidated OtherIncome
                (Expense)
            
            $
            1,190,819
            
            $
            1,752,661
            
            $
            (561,842
            )
            
            -32
            %





Consolidated
      Other Income (Expense) decreased approximately $0.6 million, from approximately
      $1.8 million during the year ended November 30, 2004, to approximately $1.2
      million for the year ended November 30, 2005.




26
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            Statements**




The
      material factors contributing to the net decrease as set forth in the above
      table are as follows:




(a)
            Interest
                income increased approximately $0.4 million, or 76%, with the increase
                related to more favorable rates available during Fiscal 2005 when
                compared
                to Fiscal 2004. The general interest rate environment improved, as
                measured by the average 12 month treasury yield of 2.68% in Fiscal
                2005,
                compared to 1.41% in Fiscal 2004, for a relative increase of 90%
                compared
                to our interest income increase of 76%. Additionally, interest income
                was
                positively impacted in the fourth quarter of Fiscal 2005 with
                approximately $68,000 of interest income paid to us, as a result
                of a
                settlement award secured by us in an arbitration action against a
                vendor.




(b)
            Realized
                gains on the sale of marketable securities increased by approximately
                $0.5
                million over the comparable prior year period. This resulted from
                our
                decision in the first quarter of Fiscal 2005 to recognize unrealized
                gains
                on our equity security portfolio enabling us to utilize the federal
                tax
                benefits of capital loss carryforwards that were set to expire within
                the
                next 24 months.




(c)
            The
                year ended November 30, 2004 included $0.8 million in installment
                payments
                from a prior year’s sale of a subsidiary, compared to $0.2 million in the
                year ended November 30, 2005. The decline was the result of the
                installment agreement being completed in February,
                2005.




(d)
            The
                year ended November 30, 2004 included a collection of approximately
                $0.4
                million in settlement of a prior year’s marketing agreement dispute. No
                comparable amount is reflected in the year ended November 30,
                2005.




(e)
            Minority
                Interest resulting from our EZ Tracks partnership with Madacy
                Entertainment in Fiscal 2005 amounted to $0.5 million. The partnership
                agreement was entered into on January 12, 2005 and, as such, the
                prior
                year comparable period includes no comparable
                amount.




**MINORITY
      INTEREST**





On
      January 12, 2005, we entered into an agreement with Madacy Entertainment,
      through a newly created partnership, EZTracks LP, to market and promote
      EZTracks.com, our new web destination consisting of approximately 30,000
      downloadable songs covering a wide array of musical genres. We, through a
      wholly-owned subsidiary, own 50.7% of the partnership and will be responsible
      for managing the operations of the business, including generating traffic to
      the
      website, as well as selling advertising on the site. Madacy Entertainment,
      through its wholly-owned subsidiary, owns 49.3% of the partnership and will
      provide its inventory of music and an extensive library of music licensed from
      other parties. Madacy will have limited involvement with certain aspects of
      operations. The results of operations for the year ended November 30, 2005
      include the fully consolidated results of EZTracks LP with minority interest
      established to reflect Madacy’s ownership share of the partnership’s operating
      results for the period January 12, 2005 to November 30, 2005.




*The
      following table summarizes the results of EZ Tracks for the period January
      12,
      2005 to November 30, 2005:*


Net
                Revenues
            
            $
            8,369,797Cost
                of Sales
            
            
            7,286,976Gross
                Profit
            
            
            1,082,821General
                & Administrative Expenses
            
            
            79,712Net
                Income
            
            
            1,003,109Minority
                Interest - Income Statement
            
            
            494,533Distributions
                to Minority Interest
            
            $
            128,896





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            Statements**





**PROVISION
      FOR INCOME TAXES**





We
      provide for income taxes at the end of each interim period based on the
      estimated effective tax rate for the full fiscal year. Cumulative adjustments
      to
      the tax provision are recorded in the interim period in which a change in the
      estimated annual effective rate is determined. A final adjustment is made to
      the
      our provision for income taxes pursuant to the computation of our annual tax
      provision (benefit). Our current year’s tax provision approximates $1.0 million,
      coupled with pretax income of approximately $3.5 million. This effective rate
      relationship of 30.0%, when compared to our historical effective rate of
      approximately 36% results from two factors. We benefited from state tax
      benefits partially offset by foreign income tax expense. Additionally, in the
      fourth quarter we settled state tax audits which resulted in an approximate
      tax
      benefit of $200,000. See Note 9 of the Consolidated Financial Statements for
      further details of our tax expense(benefit), and deferred tax assets and
      liabilities. We are subject to examination by taxing authorities in
      various jurisdictions, and believe that we have adequately provided for all
      such tax liabilities. Matters raised upon audit from such jurisdictions may
      involve substantial amounts and could be material. Management considers it
      unlikely that resolution of any such matters would have a material adverse
      effect upon our consolidated financial statements.




**For
      the Year Ended November 30, 2004 Compared to Year Ended November 30,
      2003**





Our
      net
      revenues, on a segmental basis, and with disclosure of the components of the
      individual segments, for each of the fiscal years ended November 30, 2004 and
      2003, are detailed in the following tables:





**Segment
                Data - Net Revenues, by Segment Component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%****E-commerce
                components**iMatchUp.com
                dating sites
            
            $
            6,606,541
            
            $
            3,946,442
            
            $
            2,660,099
            
            
            67
            %Website
                advertising
            
            
            17,311,744
            
            
            11,970,259
            
            
            5,341,485
            
            
            45
            %Net
                branch commission fees
            
            
            —
            
            
            355,981
            
            
            (355,981
            )
            
            -100
            %Search
                Engine Marketing revenues
            
            
            2,059,722
            
            
            —
            
            
            2,059,722
            
            
            100
            %Email
                marketing programs
            
            
            6,308,914
            
            
            8,460,131
            
            
            (2,151,217
            )
            
            -25
            %Data
                sales and rentals
            
            
            1,454,599
            
            
            2,031,973
            
            
            (577,374
            )
            
            -28
            %Sales
                of jewelry and gifts
            
            
            190,434
            
            
            925,897
            
            
            (735,463
            )
            
            -79
            %Internet
                game development and other
            
            
            1,047,269
            
            
            1,108,874
            
            
            (61,605
            )
            
            -6
            %**Total
                E-commerce**
            
            
            34,979,223
            
            
            28,799,557
            
            
            6,179,666
            
            
            21
            %**Off-line
                Marketing Service components**Net
                branch commission fees
            
            
            —
            
            
            2,017,225
            
            
            (2,017,225
            )
            
            -100
            %**Total
                Off-line Marketing Services**
            
            
            —
            
            
            2,017,225
            
            
            (2,017,225
            )
            
            -100
            %**LEC
                Billed Products and Services components**Click-Help,
                WWA, and TXNet LEC Products
            
            
            2,301,991
            
            
            1,572,070
            
            
            729,921
            
            
            46
            %**Total
                LEC Billed Products and Services**
            
            
            2,301,991
            
            
            1,572,070
            
            
            729,921
            
            
            46
            %**TOTAL
                CONSOLIDATED NET REVENUE**
            
            $
            37,281,214
            
            $
            32,388,852
            
            $
            4,892,362
            
            
            15
            %






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            to Financial
            Statements**




Net
      Revenue increased approximately $4.9 million, or 15%, to $37.3 million for
      the
      year ended November 30, 2004, from $32.4 million in the prior year. E-commerce
      segment revenue had a net increase of approximately $4.2 million on a
      comparative basis with the prior year, attributable primarily to increases
      in
      website advertising revenue, with the total increase in E-commerce revenue
      of
      $6.2 million including $2.1 million in revenue earned from our July 1, 2004
      acquisition of the assets of a search engine marketing business,
      SendTraffic,com, Inc. (SendTraffic). Search Engine revenue is shown after
      intercompany eliminations. Net revenue in our LEC Billed Product segment
      increased $0.7 million, to $2.3 million, resulting from increased marketing
      and
      enrollments into our various LEC products during the first six months of fiscal
      2004, as compared to approximately $1.6 million in revenue for the prior year’s
      comparable period. Offsetting the foregoing revenue increases was a decline
      in
      net revenue that resulted from the sale of our majority-owned subsidiary
      (Montvale Management, LLC) during the quarter ended May 31, 2003. Such
      subsidiary accounted for approximately $2.0 million of our Off-line Marketing
      Service segment revenue, or 6% of our consolidated revenue during the year
      ended
      November 30, 2003. Our E-commerce segment’s net revenue included approximately
      $0.4 million in online revenue earned by Montvale in Fiscal 2003. In total,
      Montvale accounted for $2.4 million, or 7.3%, of revenue during the year ended
      November 30, 2003.





Our
      cost
      of sales during the years ended November 30, 2004 and 2003, were comprised
      of
      (1) direct and indirect marketing costs associated with the
      acquisition  and
      retention of consumers for our marketing programs, including direct response
      email marketing costs, website registrations, customer profiles, other customer
      acquisition costs (such as outbound telemarketing), promotional and creative
      costs, and premium fulfillment costs, and (2) the related contingent-based
      sweepstakes indemnification expense, billing and collection fees and customer
      service costs.





Our
      cost
      of sales, on a segmental basis, and with disclosure of the components of the
      individual segments for each of the years ended November 30, 2004 and 2003,
      are
      set forth below:





**Consolidated
                Cost of Sales, by Segment, by Component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%****E-commerce****Advertising,
                promotion and fulfillment costs**Email
                marketing and related delivery costs
            
            $
            4,085,746
            
            $
            4,525,931
            
            $
            (440,185
            )
            
            -10
            %Website
                registrations, customer profiles andother
                related customer acquisition costs
            
            
            13,581,230
            
            
            6,435,162
            
            
            7,146,068
            
            
            111
            %Promotional,
                creative and other costs
            
            
            343,494
            
            
            366,115
            
            
            (22,621
            )
            
            -6
            %Search
                Engine Marketing Costs of Revenue
            
            
            1,449,597
            
            
            —
            
            
            1,449,597
            
            
            100
            %**Total
                E-commerce Advertising**
            
            $
            19,460,067
            
            $
            11,327,208
            
            $
            8,132,859
            
            
            72
            %**Service
                Bureau fees**Contingent
                based prize indemnification costs
            
            $
            300,278
            
            $
            526,502
            
            
            (226,224
            )
            
            -43
            %**Total
                E-commerce Cost of Sales**
            
            $
            19,760,345
            
            $
            11,853,710
            
            $
            7,906,635
            
            
            67
            %**Off-line
                Marketing Services****Advertising,
                promotion and fulfillment costs**Telemarketing,
                direct mail and related costs
            
            $
            —
            
            $
            261,786
            
            $
            (261,786
            )
            
            -100
            %**Total
                Off-line Marketing Cost of Sales**
            
            $
            —
            
            $
            261,786
            
            $
            (261,786
            )
            
            -100
            %**LEC
                Billed Products and Services****Service
                Bureau fees**Service
                provision, billing and collection costs
            
            $
            2,292,265
            
            $
            965,059
            
            
            1,327,206
            
            
            138
            %**Total
                LEC Billed Cost of Sales**
            
            $
            2,292,265
            
            $
            965,059
            
            $
            1,327,206
            
            
            138
            %**Consolidated
                Cost of Sales**
            
            $
            22,052,610
            
            $
            13,080,555
            
            $
            8,972,055
            
            
            69
            %






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            to Financial
            Statements**





Cost
      of
      sales on a consolidated basis increased $9.0 million, or 69%, to $22.1 million
      for the year ended November 30, 2004 from $13.1 million for the year ended
      November 30, 2003.





The
      primary factor contributing to the increase in consolidated cost of sales was
      related to a net increase of approximately $8.1 million in costs incurred by
      our
      E-commerce segment in the generation of its increased revenues. This E-commerce
      segment cost increase is attributable to two factors: (1) a net increase in
      costs of approximately $6.4 million from our core revenue-generating activities;
      and (2) the inclusion of the cost of revenue generation from our July 1, 2004
      acquisition of SendTraffic, with such cost of revenue accounting for $1.5
      million, or 6.6% of consolidated cost of sales during the year ended November
      30, 2004.





The
      E-commerce segment net increase in the cost of sales from our core revenue
      generating activities resulted from: an increase of approximately $7.1 million
      in costs incurred for website registrations, customer profiles and other costs
      of online customer acquisitions, all necessary to support our increased
      E-commerce revenue generation, as discussed above; offset by (1) a decrease
      in
      email marketing costs of approximately $0.4 million, related to our decreased
      use of third-party email vendors in the promotion of our email revenue
      generating opportunities pursuant to declines in margin, which resulted from
      the
      ISP’s increasing their filtering of commercial email messages, regardless of
      whether the email is permission-based; and (2) a decrease in contingent prize
      indemnification costs of approximately $0.3 million, attributable to a reduction
      in the size of the sweepstakes prizes, and the related impact on indemnification
      pricing. Also, see “Consolidated Gross Profit, by Segment” for a discussion of
      anticipated future revenue recognition as a result of current period costs
      incurred.





Other
      increases in cost of sales related to our LEC Billed Product segment, which
      amounted to approximately $1.3 million, or an increase of 138%, when compared
      to
      the prior year. During the first six months of the year ended November 30,
      2004,
      we incurred a significant increase in marketing expenditures due to a test
      marketing campaign utilizing outbound telemarketing for LEC Billed Product
      segment customer acquisitions. Such marketing expenditures amounted to
      approximately $0.8 million during the year ended November 30, 2004. Management
      had anticipated that this marketing effort would have established a base of
      recurring billed customers that would generate revenues unencumbered by
      additional marketing costs in future fiscal periods. Subsequent to this
      assessment, we experienced an increase in the levels of customer service and
      account cancellations, significantly reducing the future revenue benefits
      attributable to this LEC Billed Products customer base. This decline should
      be
      considered in the assessment of future fiscal period revenues, as it relates
      to
      the LEC Billed Products segment. We currently do not intend to continue using
      outbound telemarketing for this business line in future fiscal periods, but
      do
      intend to apply the results of this test marketing to market other products
      and
      services through this outbound telemarketing channel. The LEC Billed Products
      segment does not have any long lived assets associated to the segment. Resulting
      from the increase levels of cancellations, we experienced an increase in costs
      of sales due to the associated customer service costs.





Our
      gross
      profit in terms of dollars, on a segmental basis, and our gross profit
      percentage, on a segmental basis, for each of the years ended November 30,
      2004
      and 2003, are set forth below:





**Consolidated
                Gross Profit, by Segment****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%**E-commerce
            
            $
            15,218,878
            
            $
            16,945,847
            
            $
            (1,726,969
            )
            
            -10
            %Off-line
                Marketing services
            
            
            —
            
            
            1,755,439
            
            
            (1,755,439
            )
            
            -100
            %LEC
                Billed products and services
            
            
            9,726
            
            
            607,011
            
            
            (597,285
            )
            
            -98
            %**CONSOLIDATED
                TOTALS**
            
            $
            15,228,604
            
            $
            19,308,297
            
            $
            (4,079,693
            )
            
            -21
            %






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            Statements**




**Consolidated
                Gross Profit Percentages, by segment****Absolute**
            
            **Relative****percentage**
            
            **percentage****change**
            
            **Change****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **inc(dec)**
            
            **inc(dec)**E-commerce
            
            
            43.5
            %
            
            58.8
            %
            
            -15.3
            %
            
            -26.1
            %Off-line
                Marketing services
            
            
            0.0
            %
            
            87.0
            %
            
            -87.0
            %
            
            -100.0
            %LEC
                Billed products and services
            
            
            0.4
            %
            
            38.6
            %
            
            -38.2
            %
            
            -98.9
            %**CONSOLIDATED
                GROSS PROFIT PERCENTAGE**
            
            
            40.8
            %
            
            59.6
            %
            
            -18.8
            %
            
            -31.5
            %





Consolidated
      Gross Profit ("Gross Margin") as a percentage of net revenue was 40.8% during
      the year ended November 30, 2004, compared to 59.6% in the prior year,
      representing an absolute percentage point decrease of 18.8%, or a 31.5% decrease
      on a relative basis.





The
      decline in gross profit is primarily attributable to four factors: (1) increased
      website registration, customer profile and other third-party online customer
      acquisition costs for our websites recognized in our core business; (2) new
      LEC
      Billed Products segment customer acquisition marketing efforts, primarily during
      the first six months of Fiscal 2004 (which effort was curtailed in the third
      quarter of Fiscal 2004), coupled with increased chargeback and related customer
      service costs attributable to such LEC Billed Products segment customers during
      the year ended November 30, 2004; (3) our shift in reaction to regulatory
      changes whereby we migrated a portion of our marketing efforts from higher
      margin email revenue to lower margin website based revenue; and (4) the gross
      profit contribution from the SendTraffic asset acquisition during the period
      July 1, 2004 (acquisition date) to November 30, 2004, which was approximately
      29.6% (after consolidation, transfer pricing and inter-company profit
      eliminations), and was significantly less than the historically recognized
      gross
      profit of our core business. Additionally, the impact on gross profit from
      our
      iMatchUp.com dating sites results from the expensing of the costs of customer
      acquisition during the period we acquire and expense the free iMatchUp.com
      membership account, while the recognition of the revenue is dependent upon
      whether or not the free account converts to a paying membership. The period
      that
      a free account may convert to a billable account ranges from one week after
      acquisition, to as long as two years, and longer, after its initial month of
      acquisition, based on available historical conversion to billable experience.
      Therefore, predicated on stabilized acquisition costs in future fiscal periods,
      we expect that the future conversions of free membership acquisitions to
      billable members, as well as the anticipated renewal revenues from such acquired
      customers, should allow us to report improved gross profit margins attributable
      to such memberships in our E-commerce segment in future fiscal
      periods.





Our
      Selling Expenses for each of the years ended November 30, 2004 and 2003, are
      presented, on a segmental basis, and with the components of the individual
      segments, in the tables set forth below:




**Segment
              Data - Consolidated Selling
              Expenses, by segment, by component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%****E-commerce**Fee
                share commissions
            
            $
            1,190,894
            
            $
            4,096,037
            
            $
            (2,905,143
            )
            
            -71
            %Selling
                salaries and related expenses
            
            
            878,034
            
            
            1,421,749
            
            
            (543,715
            )
            
            -38
            %Travel
                and entertainment
            
            
            254,582
            
            
            131,496
            
            
            123,086
            
            
            94
            %**TOTAL
                Selling - E-commerce segment**
            
            
            2,323,510
            
            
            5,649,282
            
            
            (3,325,772
            )
            
            -59
            %**Off-line
                Marketing Services**Selling
                salaries and related expenses
            
            
            —
            
            
            796,014
            
            
            (796,014
            )
            
            -100
            %Occupancy
                and equipment costs
            
            
            —
            
            
            45,623
            
            
            (45,623
            )
            
            -100
            %Travel
                and entertainment
            
            
            —
            
            
            5,005
            
            
            (5,005
            )
            
            -100
            %**TOTAL
                Selling - Off-line segment**
            
            
            —
            
            
            846,642
            
            
            (846,642
            )
            
            -100
            %**Consolidated
                Totals**
            
            $
            2,323,510
            
            $
            6,495,924
            
            $
            (4,172,414
            )
            
            -64
            %






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            Statements**




Selling
      expenses, on a consolidated basis, decreased approximately $4.2 million, or
      64%,
      from $6.5 million during the year ended November 30, 2003 to $2.3 million during
      the year ended November 30, 2004. The decrease was primarily related to an
      approximate $3.3 million reduction in E-commerce segment selling expenses,
      of
      which (a) approximately $2.9 million relates to a decrease in commissions and
      correlates to our reduced use of third-party databases in the promotion of
      our
      email services (which decrease relates to the alternative use of capital for
      increased website registration, customer profile and other online customer
      acquisition costs as discussed in the “Cost of Goods Sold” section, above), and
      (b) approximately $0.5 million relates to decreases in salaries and related
      costs resulting from cost-cutting reductions to our sales force undertaken
      in
      the second half of Fiscal 2003.





Additionally,
      a portion of the decrease, or $0.8 million, resulted from the sale of our
      majority-owned subsidiary, Montvale Management, LLC, in March 2003.





Our
      general and administrative expenses ("G&A") are principally comprised of (i)
      compensation costs and related expenses for executive, finance, information
      and
      operation systems, and general administration personnel, (ii) professional
      fees
      (which include legal; audit, accounting and tax; Sarbanes-Oxley compliance
      costs; public relations; database management and consulting; and public company
      related printing and filing costs), (iii) insurance costs, (iv) occupancy and
      other equipment rental costs, (v) site development, maintenance and modification
      costs related to our various active segments, and (vi) all other general and
      miscellaneous corporate expense items.





Our
      General and Administrative Expenses for the years ended November 30, 2004 and
      2003, are presented, on a segmental basis, and with the components of the
      individual segments, in the tables set forth below:





**Segment
              Data - Consolidated General and Administrative Expenses, by segment,
              by
              component****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%****E-commerce**Compensation
                costs and related expenses
            
            $
            4,005,793
            
            $
            4,102,192
            
            $
            (96,399
            )
            
            -2
            %Professional
                fees
            
            
            727,952
            
            
            1,336,416
            
            
            (608,464
            )
            
            -46
            %Insurance
                costs
            
            
            539,372
            
            
            492,566
            
            
            46,806
            
            
            10
            %Occupancy
                and equipment costs
            
            
            281,784
            
            
            320,351
            
            
            (38,567
            )
            
            -12
            %Site
                development, maintenance andmodifications
            
            
            1,380,562
            
            
            1,580,553
            
            
            (199,991
            )
            
            -13
            %Search
                Engine Acquisition Overhead
            
            
            717,340
            
            
            —
            
            
            717,340
            
            
            100
            %All
                other G&A expenses
            
            
            1,233,428
            
            
            1,238,338
            
            
            (4,910
            )
            
            0
            %**TOTAL
                G&A - E-commerce segment**
            
            
            8,886,231
            
            
            9,070,416
            
            $
            (184,185
            )
            
            -2
            %**Off-line
                Marketing Services**Professional
                fees
            
            
            —
            
            
            21,229
            
            
            (21,229
            )
            
            -100
            %All
                other G&A expenses
            
            
            —
            
            
            691,351
            
            
            (691,351
            )
            
            -100
            %**TOTAL
                G&A - Off-line segment**
            
            
            —
            
            
            712,580
            
            
            (712,580
            )
            
            -100
            %**LEC
                Billed Products and Services**Compensation
                costs and related expenses
            
            
            311,250
            
            
            308,574
            
            
            2,676
            
            
            1
            %Professional
                fees
            
            
            97,997
            
            
            42,976
            
            
            55,021
            
            
            128
            %Insurance
                costs
            
            
            52,623
            
            
            27,113
            
            
            25,510
            
            
            94
            %All
                other G&A expenses
            
            
            29,071
            
            
            96,273
            
            
            (67,202
            )
            
            -70
            %**TOTAL
                G&A - LEC segment**
            
            
            490,941
            
            
            474,936
            
            
            16,005
            
            
            3
            %**Corporate**Compensation
                costs and related expenses
            
            
            1,547,134
            
            
            1,557,307
            
            
            (10,173
            )
            
            -1
            %Professional
                fees
            
            
            881,977
            
            
            705,012
            
            
            176,965
            
            
            25
            %Insurance
                costs
            
            
            473,608
            
            
            520,560
            
            
            (46,952
            )
            
            -9
            %All
                other G&A expenses
            
            
            552,348
            
            
            605,713
            
            
            (53,365
            )
            
            -9
            %**TOTAL
                G&A - Corporate**
            
            
            3,455,067
            
            
            3,388,592
            
            
            66,475
            
            
            2
            %**Consolidated
                Totals**
            
            $
            12,832,239
            
            $
            13,646,524
            
            $
            (814,285
            )
            
            -6
            %






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General
      and Administrative expenses ("G&A") on a consolidated basis decreased
      approximately $0.8 million, or 6%, when comparing G&A of $12.8 million for
      the year ended November 30, 2004 to G&A of $13.6 million incurred during the
      year ended November 30, 2003. The significant portion of the net decrease was
      attributable to decreases in our: (a) Off-line Marketing Service segment ($0.7
      million) pursuant to our disposition of our majority-owned subsidiary (Montvale
      Management, LLC) in March 2003; and (b) E-commerce segment ($0.2 million),
      relating to reductions in: (i) compensation costs pursuant to cost cutting
      reductions to our workforce undertaken in the second half of Fiscal 2003, (ii)
      professional fees reflecting reduced requirements for litigation defense, and
      (iii) other expenses primarily reflecting the benefit of general cost reduction
      efforts undertaken in the second half of Fiscal 2003. The year ended November
      30, 2004 included approximately $718,000 of overhead related to SendTraffic,
      which was acquired on July 1, 2004. Specifically, for the period July 1, 2004
      to
      November 30, 2004, SendTraffic’s overhead included compensation costs and
      related expenses of approximately $569,000; site development, maintenance and
      modification costs of approximately $25,000; office rent of $15,000; and other
      G&A of approximately $108,000. The SendTraffic acquisition resulted in
      identifiable intangible assets generating amortization expense of approximately
      $179,000 in fiscal 2004, with this amount being included in the E-commerce
      expense line item “All other G&A expenses”.





Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. We incurred approximately $695,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the year ended November 30, 2004. We incurred
      approximately $733,000 in legal fees (exclusive of disbursements) from FKIWSBR
      during the year ended November 30, 2003.




**Consolidated
              Bad Debt Expense, by Segment****Change**
            
            **Change****Inc(Dec)**
            
            **Inc(Dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%**E-commerce
            
            $
            406,699
            
            $
            576,350
            
            $
            (169,651
            )
            
            -29
            %**Consolidated
                Totals**
            
            $
            406,699
            
            $
            576,350
            
            $
            (169,651
            )
            
            -29
            %





Bad
      Debt
      expense decreased approximately $0.2, or 29%, to bad debt expense of $0.4
      million in the year ended November 30, 2004, as compared to bad debt expense
      of
      $0.6 million incurred in the year ended November 30, 2003.





Fiscal
      2004 bad debt expense is primarily attributable to one specific customer who
      accounted for approximately $390,000 of bad debt, coupled with an approximate
      $17,000 net increase in our reserve for smaller accounts. The Fiscal 2003 bad
      debt expense was attributable to one specific customer who accounted for
      approximately $622,000 of bad debt, coupled with an approximate $46,000 net
      decrease in our reserve for smaller accounts. Our allowance for bad debts
      results from our assessment of the risk of collection embedded in our customer
      base as described below.





We
      continuously evaluate the potential of the collectibility of trade receivables
      by reviewing such factors as deterioration in the operating results, financial
      condition or bankruptcy filings of our customers. As a result of this review
      process, we record adjustments to bad debt provisions/(recaptures) to reflect
      the related accounts receivable carrying amount to amounts that estimate their
      probable realizable value. Provisions for bad debts are also recorded resulting
      from the review of other factors, including (a) length of time the accounts
      receivable are past due and (b) historical experience and other factors obtained
      during collection efforts. If circumstances related to specific customers
      change, our estimates for bad debt provision/(recaptures) could be further
      increased or decreased in future fiscal periods.




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**OTHER
      INCOME (EXPENSE)**





The
      components of our "Other income (expense)" for the years ended November 30,
      2004
      and 2003 are set forth below:





**change**
            
            **change****inc(dec)**
            
            **inc(dec)****For
                the Year Ended November 30,**
            
            **2004**
            
            **2003**
            
            **$$$**
            
            **%%%**Other
                income (expense):Interest
                income and dividends
            
            $
            544,153
            
            $
            479,934
            
            $
            64,219
            
            
            13.1
            %Realized
                gains on sale of marketable securities
            
            
            25,490
            
            
            19,730
            
            
            5,760
            
            
            29
            %Realized
                gain on sale of subsidiary
            
            
            784,900
            
            
            1,375,801
            
            
            (590,901
            )
            
            -43
            %Other
                non-operating income:Other
                miscellaneous income(expense)
            
            
            104,311
            
            
            (54,068
            )
            
            158,379
            
            
            -293
            %Vendor
                settlement on prior year marketing fee
            
            
            350,000
            
            
            —
            
            
            350,000
            
            
            100
            %Foreign
                Currency Exchange Rate Fees and interest
            
            
            (20,793
            )
            
            —
            
            
            (20,793
            )
            
            100
            %Interest
                and penalties - tax audits and settlements
            
            
            (69,581
            )
            
            —
            
            
            (69,581
            )
            
            100
            %Reduction
                of prior year's LEC reserve
            
            
            34,181
            
            
            —
            
            
            34,181
            
            
            100
            %Minority
                interest (income) loss
            
            
            —
            
            
            (137,567
            )
            
            137,567
            
            
            -100
            %Total
                Consolidated OtherIncome
                (Expense)
            
            $
            1,752,661
            
            $
            1,683,830
            
            
            68,831
            
            
            4
            %





Consolidated
      Other Income (Expense) increased approximately $69,000, when comparing the
      year
      ended November 30, 2004, to the year ended November 30, 2003.





The
      material offsetting factors contributing to the net increase, in their order
      of
      magnitude, as set forth in the above table, are as follows:





(a)
            Our
                year ended November 30, 2004 realized $785,000 in installment payment
                gains from a prior year sale of a subsidiary. Our comparable prior
                year
                had realized $1.4 million from such subsidiary sale, the bulk of
                which
                related to payments received at closing in March 2003. Offsetting
                this
                decline was the increase in other income resulting from the elimination
                of
                minority interest in connection with the sale of this
                subsidiary.





(b)
            Partially
                offsetting this decrease, we collected $350,000 in settlement of
                a prior
                year’s marketing agreement dispute. The amount collected had originally
                been charged to our cost of goods sold accounts in Fiscal 2000. In
                Fiscal
                2000, we had expended $650,000 as a non-refundable prepayment for
                the
                delivery of 1 million on-line customers to our website properties
                under
                the above referenced marketing agreement. The marketing partner’s failure
                to satisfactorily deliver the requisite number of on-line customers
                to us
                was the basis for the settlement received by us during the year ended
                November 30, 2004.




(c)
            During
                the year ended November 30, 2004, we settled a Florida Intangible
                Tax
                dispute as it related to one of our wholly-owned subsidiaries. The
                disputed period covered the Florida Intangible tax years of 1997
                and 1998.
                The open years were settled with the Florida Department of Revenue
                for:
                (i) an intangible tax assessment of $58,663, which had been accrued
                for in
                our tax provision in a previous fiscal year; (ii) interest expense
                of
                $39,596; and (iii) penalties of $14,594, with both being expensed
                during
                the year ended November 30, 2004.






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**PROVISION
      FOR INCOME TAXES**





We provide
      for income taxes at the end of each interim period based on the estimated
      effective tax rate for the full fiscal year. Cumulative adjustments to the
      tax
      provision are recorded in the interim period in which a change in the estimated
      annual effective rate is determined. A final adjustment is made to our provision
      for income taxes pursuant to the computation of our annual tax provision
      (benefit). Our current year’s tax provision approximates $405,000, coupled with
      pre tax income of approximately $1,418,000. This effective rate relationship
      of
      28.5%, when compared to our historical effective rate of approximately 39%
      results from several offsetting factors. We recognized tax benefits from the
      use
      of approximately $0.8 million in previously devalued capital loss carryover
      deferred tax assets. Such prior year devalued capital loss deferred tax assets
      were utilized in Fiscal 2004 to offset the tax expense on current year’s capital
      gain income of approximately $0.8 million. Additionally, we benefited from
      state
      tax benefits partially offset by foreign income tax expense. See Note 8 of
      the
      Consolidated Financial Statements for further details of our tax
      expense(benefit), and deferred tax assets and liabilities. We are subject to
      examination by taxing authorities in various jurisdictions, and believe that
      we
      have adequately provided for all such tax liabilities. Matters raised upon
      audit
      from such jurisdictions may involve substantial amounts and could be material.
      Management considers it unlikely that resolution of any such matters would
      have
      a material adverse effect upon our consolidated financial statements.





**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      November 30, 2005, we had aggregate working capital of $30.7 million compared
      to
      aggregate working capital of $34.6 million as of November 30, 2004. We had
      available cash, cash equivalents, equities and readily available marketable
      debt
      securities of $28.2 million as of November 30, 2005, compared to available
      cash,
      cash equivalents, equities and readily available marketable debt securities
      of
      $35.8 million as of November 30, 2004. The equity component of our marketable
      securities was $1.9 million at November 30, 2005, compared to $1.8 million
      at
      November 30, 2004. The increase in our equity positions was attributable to
      a
      combination of increases in the fair market values of securities in our
      portfolio at November 30, 2005 and 2004, respectively, and additional security
      purchases.





Cash
      provided by operating activities was approximately $ 1.0 million
      for the year ended November 30, 2005, compared to approximately $2.8 million
      in
      cash provided by operating activities during the year ended November 30, 2004,
      representing an approximate $ 1.8 million
      decrease in cash provided by operating activities. The primary factor giving
      rise to the decrease in cash provided by operating activities was attributable
      to an increase in accounts receivable of approximately $ 5.7 million,
      being partially offset by increases in accounts payable and accrued expenses
      approximating $2.4 million, and the effect of net income of $ 2.4 million
      for the year ended November 30, 2005 compared to net income of $1.0 million
      for
      the year ended November 30, 2004.





Cash
      provided by investing activities was approximately $3.4 million during the
      year
      ended November 30, 2005, compared to $2.7 million used in investing activities
      during the year ended November 30, 2004. The primary source of cash
      provided by investing activities during the year ended November 30, 2005 related
      to $6.8 million in proceeds from security sales in excess of reinvestments.
      Additionally, cash was generated from the collection of approximately $0.2
      million on installments from the prior year’s sale of one of our subsidiaries.
      Cash was used in investing activities for the asset acquisition of Hot Rocket
      Marketing in January 2005 (approximately $3.0 million) and capital expenditures
      of approximately $0.4 million.




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Cash
      used
      for financing activities was approximately $2.6 million during the year ended
      November 30, 2005, compared to $2.5 million used by financing activities during
      the year ended November 30, 2004. During the year ended November 30, 2005 we
      declared and paid four quarterly dividends, amounting to approximately $4.5
      million and made approximately $0.1 million in distributions to a minority
      interest holder. We offset such outflows with approximately $2.1 million in
      proceeds from stock options exercised. During the year ended November 30, 2004,
      we had used approximately $4.3 million in payment of four quarterly dividends,
      and offset such outflows of cash by inflows of approximately $1.7 million in
      proceeds from stock option exercises.





Our
      days-sales-outstanding ("DSO") in accounts receivable at November 30, 2005
      was
      65 days, compared to 58 days at August 31, 2005, 58 days at May 31, 2005, 44
      days at February 28, 2005, and 46 days at November 30, 2004. The increase in
      the
      current quarter’s DSO compared to the third quarter of the current fiscal year
      relates to the blend of our customers and marketing agreement terms. The
      collection cycles attributable to our E-Commerce clients have increased
      throughout Fiscal 2005. Our DSO may rise above 65 days in future fiscal periods
      primarily in the event of growth in revenues from our customers who are
      offered longer term increases.





The
      majority of our customers are extended 30-day credit terms. In limited
      instances, customer credit is extended to ranges approximating 90 days. We
      continually monitor customers’ adherence to their credit terms and constantly
      strive to improve the effectiveness of our collection efforts with the goal
      of
      achieving a DSO in the 40-day range. Future fiscal periods might not reflect
      this goal of a 40-day DSO, and might exceed the 65-day DSO recognized during
      the
      year ended November 30, 2005.





Historically,
      our primary cash re quirements
      have been used to fund the cost of advertising and promotion and test-marketing
      new products, services and promotions, with additional funds having been used
      in
      the purchasing of equipment and services in connection with the commencement
      of
      new business lines, further development of businesses being test marketed and
      for the development of the equipment infrastructure of subsidiaries organized
      in
      Fiscal 2002 and 2004.




In
      Fiscal
      2000, we executed our on-line direct marketing strategy. Our future plans and
      business strategy may continue to call for our Internet-based E-commerce segment
      to be our primary operating focus, with such segment generating the material
      portion of our revenues for the years ended November 30, 2005 and 2004. In
      Fiscal
      2003 we expended $1.5 million for capital expenditures to support our E-commerce
      business while in Fiscal 2004 such expenditures declined to $0.2 million as
      a
      result of prior years’ purchases which yielded excess capacity. In Fiscal 2005
      we expended $0.4 million, nearly half of which was for the purchase of new
      servers to reduce our dependence upon outside email delivery
      suppliers.





We
      may,
      in future fiscal periods, be required to invest significant amounts of capital
      into our business. If our operations fail to generate sufficient revenue, we
      could realize a material adverse impact on our capital and liquidity resources
      resulting from expenditures necessary to generate such revenue, including,
      but
      not limited to, expenditures for (a) marketing campaigns, including media costs
      and other costs of customer acquisition information, (b) product development
      costs, (c) site development and maintenance and related technology based costs,
      (d) potential on-line, and/or off-line, business acquisitions, or (e) costs
      associated with developing alternative means of email promotion delivery.





We,
      through our wholly-owned subsidiary, Hot Rocket Acquisition Corp., acquired
      the
      assets, other than cash and receivables, and certain of the liabilities, of
      Hot
      Rocket Marketing, Inc., a privately-held on-line media and marketing agency
      ("Hot Rocket"), effective as of January 21, 2005. The purchase price was
      approximately $3.8 million, comprised of $0.7 million in shares of our
      common stock (or 113,821 shares) and $2.8 million in cash, paid to the
      sellers and $0.3 million in capitalized costs.




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In
      addition, we agreed to pay Hot Rocket a contingent purchase price of up to
      $12.50 million if Hot Rocket generates an aggregate of $27 million in
      EBITDA (as quantified in the Agreement) over the four year period following
      the
      closing. The contingent purchase price is payable in semi-annual and annual
      installments pursuant to a formula based on the satisfaction of certain
      graduating EBITDA targets. We may pay, at our option (subject to certain
      conditions and limitations), up to 50% of the contingent purchase price
      installments that may become payable, with our stock with the share price to
      be
      determined on or about the date of its issuance. Our Board has adopted a
      resolution that, if contingent purchase price payments are made to Hot Rocket,
      we will utilize our discretion to make as much of such payments in cash as
      is
      necessary to keep the aggregate of all share issuances to Hot Rocket at a
      maximum of 19.9% of our outstanding stock. We also entered into a five-year
      employment contract with Mark Colacioppo, the sole shareholder of Hot Rocket.





The
      shares of common stock issued to HBI and Hot Rocket were originally issued
      by us
      in non-public transactions, which issuances were exempt from the registration
      requirements of the Securities Act pursuant to Section 4(2) thereof.




On
      June
      30, 2004, we consummated the acquisition of the assets of SendTraffic.com,
      Inc.
      (“Send”) and its affiliated entity, The Traffic Group, LLC, (“TG”), privately
      held search engine marketing companies based in New York. We purchased the
      assets for approximately $5.0 million, comprised of $3.5 million in cash and
      233,941 shares of our common stock. The asset acquisition agreement calls for
      contingent earn-out payments based on the post closing attainment of certain
      earnings before interest, taxes, depreciation and amortization (EBITDA)
      thresholds during the thirty-six month period following the
      transaction.




On
      April
      1, 2004, we announced that we had acquired an exclusive license for an operating
      platform created by LiveOnTheNet.com, Inc. (LOTN), a privately held company.
      We
      had announced in February 2004 that we had entered into an agreement to acquire
      all of the assets of LOTN. The asset acquisition plans were discarded in favor
      of a license agreement resulting from our final stages of due diligence. The
      license agreement calls for a total payment of $200,000. A down payment of
      $50,000 was made at the time of signing the license, and installments of $15,000
      were required on the ten monthly anniversary dates following the signing. As
      of
      February 18, 2005, six $15,000 installments have been made in accordance with
      the terms of the license agreement.





In
      March
      2003, we sold our 51% majority-owned subsidiary, Montvale Management LLC
      (“Montvale”), to Mortgage Industry Consultants, LLC (“MIC”) for $1.6 million,
      plus our investment. We had obtained our 51% interest in September 1999 through
      an initial investment of approximately $50,000. The terms of the agreement
      included an initial payment of $1 million (received in March 2003) followed
      by
      an additional $600,000 to be paid in 24 monthly installments of $25,000 each.
      As
      of February 18, 2005, all required installments were received and recorded
      as
      realized gain on sale of subsidiary. At the point of sale, based on management’s
      assessment of Montvale’s future cash flows, after taking into consideration
      Montvale’s increased obligations with respect to the note obligations due us, we
      had deemed it prudent to defer recognition of income on the unpaid portion
      of
      the note. Recognition was therefore recorded under the cost recovery method.
      As
      at November 30, 2005, all note obligations have been collected.





In
      May
      2003, we received approximately $299,000, representing our GAAP basis capital
      account in such majority-owned subsidiary as at November 30, 2002, pursuant
      to
      the terms of the agreement. We also entered into a two-year Media Purchase
      Agreement whereby we agreed to provide certain media lead generation and related
      services to the continuing owners of Montvale for consideration of $40,000
      per
      month over the term of the agreement. As of February 18, 2005, we have collected
      all of the requisite payments specified under the agreement.




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Additionally,
      as we seek to further extend our reach into the E-commerce and LEC Billed
      Product arenas, as well as identifying new and other consumer oriented products
      and services in the off-line arena, we may use existing cash reserves, enter
      into long-term financing arrangements, acquire the assets of privately held
      companies, or employ other means to finance such diversification, none of which
      are specifically identifiable or measurable at this time.





**OBLIGATIONS
      AND COMMITMENTS**





We
      are
      not aware of any specific factors, outside of those described in the following
      table, and those “potential factors” described in the “Critical Accounting
      Policy and Accounting Estimate Discussion” which follows below, that are
      reasonably likely to cause a material impact, either positive or negative,
      on
      our liquidity trends. Additionally, we do not have off-balance sheet
      arrangements, other than those described in the following table, and do not
      engage in trading activities involving non-exchange traded
      contracts.




A
      summary
      table of future contractual commitments, for future minimum lease payments
      under
      non-cancelable operating leases and employment contracts are set forth below:




Operating
                  Leases
              
              Employment
                  agreements
              
              Total
                    ContractualObligationsDomestic
              
              Foreign
              
              Domestic
              
              Foreign
              
              Domestic
              
              Foreign2006
              
              $
              304,277
              
              $
              —
              
              $
              1,268,075
              
              $
              320,564
              
              $
              1,572,352
              
              $
              320,5642007
              
              
              91,955
              
              
              
              
              
              1,221,854
              
              
              4,054
              
              
              1,313,809
              
              
              4,0542008
              
              
              94,714
              
              
              
              
              
              348,469
              
              
              
              
              
              443,183
              
              
              —2009
              
              
              62,777
              
              
              
              
              
              196,200
              
              
              
              
              
              258,977
              
              
              —2010
              
              
              47,271
              
              
              
              
              
              28,209
              
              
              —
              
              
              75,480Thereafter
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —$
              600,994
              
              $
              —
              
              $
              3,062,807
              
              $
              324,618
              
              $
              3,663,801
              
              $
              324,618





**RELATED
      PARTIES**





Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. We incurred approximately $0.87 million in legal fees (exclusive
      of
      disbursements) from FKIWSBR during the year ended November 30, 2005, of which
      $0.70 million was expensed, and $0.17 million was capitalized in the Hot Rocket
      acquisition. The $0.70 million of FKIWSBR expense was then reduced by $0.36
      million, representing amounts recoverable from our insurance providers under
      the
      terms of their respective coverage provisions. As at January 20, 2006, $0.21
      million remains receivable from the insurers. We incurred approximately $0.3
      million in legal fees (exclusive of disbursements) from FKIWSBR during the
      year
      ended November 30, 2004.




38
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            Statements**





**TRANSACTIONS
      WITH MAJOR CUSTOMERS**





During
      the fiscal year ended November 30, 2005, we had eight customers in our
      E-commerce segment which, in combination, accounted for approximately $20.6
      million, or 33% of consolidated net revenues during such period, and
      approximately $5.7 million, or 51% of consolidated net accounts receivable
      as of
      November 30, 2005. The eight major customers accounted for 11.3%, 5.2%, 3.2%,
      3.0%, 2.9%, 2.6%, 2.4%, and 2.3% of consolidated net revenue for the year ended
      November 30, 2005.





During
      the fiscal year ended November 30, 2004, we had nine customers in our E-commerce
      segment which, in combination, accounted for approximately $12.1 million, or
      46%
      of consolidated net revenues during such period, and approximately $2 million,
      or 42% of consolidated net accounts receivable as of November 30, 2004. The
      nine
      major customers accounted for 11.1%, 5.8%, 3.0%, 3.0%, 2.1%, 2.0%, 1.9%, 1.8%,
      and 1.8% of consolidated net revenue for the year ended November 30, 2004.





**CRITICAL
      ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION**





In
      accordance with the Commission's Release Nos. 33-8040 and 34-45149 and FR-60
      issued in December 2001, referencing the Commission's statement "regarding
      the
      selection and disclosure by public companies of critical accounting policies
      and
      practices", we have set forth below what we believe to be the most pervasive
      accounting policies and estimates that could have a material effect on our
      Company's results of operations and cash flows, if general business conditions
      or individual customer financial circumstances change in an adverse way relative
      to the policies and estimates used in the attached financial statements or
      in
      any "forward looking" statements contained herewith.





**Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenue and expenses during the period.
      Actual results could differ from those estimates. Our most significant estimates
      relate to reserves for uncollectible receivables, reserves for data
      qualification allowances, recoverability of long-lived assets, and the
      realizability of deferred tax assets. We are subject to income taxes in the
      United States, both at the Federal level and various state levels, as well
      as
      the foreign jurisdiction of Canada. In the determination of our worldwide
      provision for income taxes and the recording of the related deferred tax assets
      and liabilities, and currently payable tax liabilities, we are required to
      use
      significant and material levels of judgment that involve many transactions
      and
      calculations. As such, the ultimate determination of our tax is uncertain,
      and
      we provide for tax contingencies in accordance with SFAS No. 5, Accounting
      for
      Contingencies. As a result of the application of SFAS No. 5, we at times
      establish reserves for the potential of additional income tax based on our
      best
      estimate of the potential for the probable loss of certain tax positions taken
      on our tax returns. We believe that our combined tax accruals and tax reserves
      are adequate for all tax years open to audit. All tax accruals and tax reserves
      are treated as current liabilities in their balance sheet
      presentation.




Additionally,
      we have potential exposure resulting from pending and/or threatened litigation
      for which we currently assess immaterial risk and, accordingly, do not provide
      for loss. Additionally, no provision for loss has been recorded for the
      potential of currently unknown actions naming us as defendant in future fiscal
      periods. Actual results could differ from our estimates.




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            Statements**





**FACTORS
      THAT COULD EFFECT FUTURE RESULTS**





**Historically
      High Levels of Volatility in Revenue and Cost Trends**





Our
      revenues and profitability from operations have historically varied. Our
      revenues, cost of providing revenues, profit margins and overhead expenses
      have
      varied historically among segments, as well as on a consolidated basis. The
      revenue allocation among our segments in future periods will most probably
      be
      different than our current revenue allocation due to several factors, including
      consumer tastes, business opportunities, regulatory issues that may exist in
      future periods, and other currently unknown factors that could impact our
      revenue generating cycle or cost structure. Therefore, it is difficult to
      predict revenue and gross margin trends, and their corresponding impact on
      liquidity and capital resources. Actual trends may cause us to adjust our
      operating emphasis, which could result in continued period-to-period
      fluctuations in our results of operations. Historically, we have been able
      to
      rapidly react to changes in the business environment within which we operate.
      Management responds to these changes as deemed appropriate at the time of
      change, and as dictated by the nature of such changes. Management's reaction
      to
      such changes could cover a broad range of business-related adjustments, ranging
      from product mix repositioning and staff reductions, to entire business model
      overhauls. Based on our current operations and marketing methods, as well as
      the
      dynamic, ever changing status of the Internet marketing environment, it is
      conceivable that we would institute changes to our business practices in future
      fiscal periods. There can be no assurance that any such potential change would
      be successful in its implementation, and there can be no assurance that any
      such
      implementation would benefit our operating margins, profitability, cash flows
      or
      capital resources.





**Revenue
      Recognition, Variable Costs and Bad Debts**





We
      currently earn the most significant portion of our revenue from the E-commerce
      segment pursuant to marketing agreements with marketing partners and corporate
      customers. The provisions of each agreement determine the type and timing of
      revenue to be recorded. We invoice our customers in accordance with the terms
      of
      the underlying agreement. Revenue is recognized at the time the marketing
      activity is delivered, or service is provided, net of estimated contractually
      specified data qualification allowances, when applicable. Such data
      qualification allowances may include duplications, invalid addresses, and age
      restrictions, and are recorded as contra-revenue. Our revenues are adjusted
      in
      later fiscal periods if actual allowances vary from amounts previously
      estimated. Historically, the variance between actual allowances and previously
      estimated allowances has been immaterial. If events were to occur that would
      cause actual allowances (which are recorded as offsets against gross revenue,
      as
      contra-revenues, in arriving at reported net revenue) to vary significantly
      from
      those originally estimated and reflected in the financial statements, we could
      suffer material deterioration in future fiscal period gross margins, and,
      therefore, our profitability, cash flows and capital resources could be
      adversely affected.





Certain
      revenue related obligations are recorded at the time revenue is recognized.
      They
      include costs payable to other on-line, as well as off-line, media companies
      for
      generating registered users and consumer data for us, database fee sharing
      costs
      under third-party database use agreements, email message delivery costs,
      contingent-based prize indemnification coverage (i.e., sweepstakes payout
      indemnification), estimated premium fulfillment costs related to the respective
      promotion (if applicable) and all other variable costs directly associated
      with
      completing our obligations relative to the revenue being recognized. Our actual
      premium fulfillment estimates have varied from that which were accrued at the
      time of recording the related revenue. This is deemed a change in management’s
      estimate, and we take the additional cost, or benefit, on the accrual adjustment
      in the fiscal period that the variance is determinable.




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            Statements**





Should
      the Internet operating landscape change resulting in (a) higher costs of
      acquiring consumer data and registered users for our websites; (b) higher costs
      of acquiring data for our marketing partners, compromising such marketing
      partners' ability to maintain adequate sized databases to allow for continued
      third-party database use agreements; (c) the InfiKnowledge asset acquisition
      failing to maintain a lower cost of our email delivery activities and web
      development and web hosting service costs as compared to our competitors, or
      us
      being required to depend on third-party emailing service bureaus, to a degree
      higher, and/or at a cost in excess of our anticipated internally-generated
      costs, than that currently utilized during the year ended November 30, 2005,
      or
      other currently unknown third-party influences on our ability to deliver email
      messages to the records in our databases, or the records in our marketing
      affiliates' databases; (d) our contingent-based prize indemnification premiums
      for indemnification coverage increasing due to an increase in the number of
      prize winners at the sites, or as a result of the insurance industry in general;
      (e) our accruals for fulfillment obligations arising out of promotions proving
      to be less than the actual redemptions processed in subsequent fiscal periods;
      or (f) unpredictable technology changes or commercial technology applications;
      then, if any one, or a combination, of the above factors were to materialize
      we
      could suffer material deterioration in future fiscal period revenue growth
      and
      gross margins and, therefore, our profitability, cash flows and capital
      resources could be materially adversely affected.




**Recent
      Accounting Pronouncements**




In
      November 2005, the FASB issued Staff Position (“FSP”) FAS 115-1/124-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      which
      addresses the determination as to when an investment is considered impaired,
      whether that impairment is other than temporary, and the measurement of an
      impairment loss. This FSP also includes accounting considerations
      subsequent to the recognition of other-than-temporary impairment and requires
      certain disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The guidance in this FSP amends FASB
      Statements No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      and
      No. 124, *Accounting
      for Certain Investments Held by Not-for-Profit Organizations* ,
      and APB
      Opinion No. 18, *The
      Equity Method of Accounting for Investments in Common Stock* . This
      FSP is effective for reporting periods beginning after December 15,
      2005. We do not believe the adoption of this FSP will have a material
      impact on our financial statements.




In
      November 2005, the FASB issued FSP FAS 123(R)-3, *Transition
      Election to Accounting for the Tax Effects of Share-Based Payment Awards.* This
      FSP
      requires an entity to follow either the transition guidance for the additional
      paid-in-capital pool as prescribed in SFAS No. 123(R), *Share-Based
      Payment* ,
      or the
      alternative transition method as described in the FSP. An entity that adopts
      SFAS No. 123(R) using the modified prospective application may make a
      one-time election to adopt the transition method described in this FSP. An
      entity may take up to one year from the later of its initial adoption of SFAS
      No. 123(R) or the effective date of this FSP to evaluate its available
      transition alternatives and make its one-time election. This FSP became
      effective in November 2005. We continue to evaluate the impact that the adoption
      of this FSP could have on our financial statements. See adoption considerations
      for SFAS 123(R), below.





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* ,
      which
      replaces APB Opinion No. 20, *Accounting
      Changes* ,
      and
      FASB Statement No. 3, Reporting *Accounting
      Changes in Interim Financial Statements* .
      Opinion
      No. 20 had required that changes in accounting principles be recognized by
      including the cumulative effect of the change in the period in which the new
      accounting principle was adopted. SFAS No. 154 requires retrospective
      application of the change to prior periods’ financial statements, unless it is
      impracticable to determine the period-specific effects of the change. The FASB
      identified the reason for the issuance of SFAS No. 154 to be part of a broader
      attempt to eliminate differences with the International Accounting Standards
      Board (IASB). The Statement is effective for fiscal years beginning after
      December 15, 2005. We do not believe the adoption of this statement will have
      a
      material impact on our financial statements.




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            Statements**





In
      December 2004, the FASB issued SFAS No. 123 (R), *Share
      Based Payment* ,
      which
      replaces SFAS 123, *Accounting
      for Stock-Based Compensation* ,
      and
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS No. 95, *Statement
      of Cash Flows* .
      In
      March of 2005, the SEC issued Staff Accounting Bulletin No. 107, *Share-Based
      Payment* (SAB
      107), regarding its interpretation of SFAS 123R and provides guidance on varying
      valuation methods available in the computation and guidance on the other related
      matters. The standard requires all share-based payments to employees, including
      grants of employee stock options, to be recognized in the income statement
      based
      on their grant-date fair values. As such, pro forma disclosure in lieu of
      expensing is no longer an alternative. The new standard is effective in the
      first interim or annual reporting period beginning after June 15, 2005. We
      are
      currently assessing the impact that the Statement may have on our financial
      statements, and due to the uncertainty of the level of share-based payments
      to
      be granted in the future, no estimates of the impact are included in the notes
      to the financial statements.





In
      December 2004, the FASB issued SFAS 153, *Exchanges
      of Nonmonetary Assets* ,
      which
      amends APB Opinion No. 29. The guidance in APB 29, *Accounting
      for Nonmonetary Transactions* ,
      is
      based on the principle that exchanges of nonmonetary assets should be measured
      based on the fair value of the assets exchanged. The amendment made by SFAS
      153
      eliminates the exception for exchanges of similar productive assets and replaces
      it with a broader exception for exchanges of nonmonetary assets that do not
      have
      commercial substance. The provisions of the statement became effective for
      exchanges taking place in fiscal periods beginning after June 15, 2005. The
      adoption of this Statement did not have a material impact on our financial
      statements.




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            Statements**





**Item
      8.****FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





Reference
      is made to the Financial Statements referred to in the accompanying Index,
      setting forth the consolidated financial statements of Traffix, Inc. and
      subsidiaries, together with the report of PricewaterhouseCoopers LLP dated
      February 28, 2006.





**Item
      9A. CONTROLS AND PROCEDURES**





(a)
              Evaluation
                  of disclosure controls and procedures.





Our
      Chief Executive
      Officer and Chief Financial Officer, after evaluating the effectiveness of
      our
      disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
      and 15d-15e)) as of the end of the period covered by this Annual Report, have
      concluded that as of that date, our disclosure controls and procedures were
      adequate and effective, and communicated to us to allow for timely decisions
      regarding required disclosure, and to ensure that information required to
      be disclosed by us in the reports we file or submit with the Securities and
      Exchange Commission is recorded, processed, summarized and reported within
      the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms.





(b)
            Changes
                in internal control over financial
                reporting.




There
      were no changes in our internal control over financial reporting identified
      in
      connection with the evaluation required by Exchange Act Rules 13a-15(d) and
      15d-15 that occurred during the period covered by this Annual Report that has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.





**PART
      III**





**Item
      10.****DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**





**Directors
      and Executive Officers**





Set
      forth
      below are the directors and executive officers of our Company, their respective
      names and ages, positions with our Company, principal occupations and business
      experiences during at least the past five years and the dates of the
      commencement of each individual's term as a director and/or officer.





Name
            
            Age
            
            PositionJeffrey
                L. Schwartz
            
            57
            
            Chairman
                of the Board and Chief Executive OfficerAndrew
                Stollman
            
            40
            
            President,
                Secretary and DirectorDaniel
                Harvey
            
            47
            
            Chief
                Financial OfficerRichard
                Wentworth
            
            56
            
            Chief
                Operating OfficerMurray
                L. Skala
            
            59
            
            DirectorEdwin
                A. Levy
            
            68
            
            DirectorLawrence
                Burstein
            
            63
            
            DirectorMark
                Gutterman
            
            50
            
            DirectorRobert
                B. Machinist
            
            53
            
            Director








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            Statements**


**Directors**





Jeffrey
      L. Schwartz has been our Chairman and Chief Executive Officer since January
      1995, Secretary/Treasurer from September 1993 to December 1994 and a director
      since our inception in 1993. From January 1979 until May 1998, Mr. Schwartz
      was
      also Co-President and a director of Jami Marketing Services, Inc., a list
      brokerage and list management consulting firm, Jami Data Services, Inc., a
      database management consulting firm, and Jami Direct, Inc., a direct mail
      graphic and creative design firm (collectively, the "Jami Companies"). The
      Jami
      Companies were sold by the principals thereof in May 1998.





Andrew
      Stollman has been our President since November 21, 2002, Chief Operating Officer
      from January 1, 2001 to November 21, 2002, and Secretary and a director Company
      since January 1995. From February 2000 until January 2001, Mr. Stollman was
      also
      our Executive Vice President and from January 1995 until February 2000, he
      was
      Senior Vice President. Mr. Stollman was our President from September 1993 to
      December 1994.





Murray
      L.
      Skala has been a director since October 1995. Mr. Skala has been a partner
      in
      the law firm of Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine, LLP
      since 1976. Mr. Skala is also a director of JAKKS Pacific, Inc., a publicly-held
      company in the business of developing, marketing and distributing children's
      toys.




Edwin
      A.
      Levy has been a director since November 1995. Mr. Levy has been the Chairman
      of
      the Board of Levy, Harkins & Co., Inc., an investment advisor, since 1979,
      and is also a director of Coastcast Corp., a publicly-held company in the
      business of manufacturing golf club heads.





Lawrence
      Burstein has been a director since April 1999. Since March 1996, Mr. Burstein
      has been Chairman of the Board and a principal shareholder of Unity Venture
      Capital Associates, Ltd., a private venture capital firm. For approximately
      ten
      years prior thereto, Mr. Burstein was the President, a director and principal
      stockholder of Trinity Capital Corporation, a private investment banking
      concern. Trinity ceased operations upon the formation of Unity Venture in 1996.
      Mr. Burstein is a director of several companies, being, respectively, THQ,
      Inc.,
      engaged in the development and marketing of games for Sony, Microsoft and
      Nintendo; CAS Medical Systems, Inc., engaged in the manufacture and marketing
      of
      blood pressure monitors and other disposable products, principally for the
      neonatal market and I.D. Systems Inc., engaged in the design, development and
      production of a wireless monitoring and tracking system which uses radio
      frequency technology.  Mr. Burstein also is the Chairman and director of
      American Telecom Services, Inc., a supplier of bundled telecommunication
      services.




Mark
      Gutterman has been a director since November 2003. He had previously served
      as a
      director form December 1995 to April 1999. Mr. Gutterman has been Chief
      Financial Officer of Starpoint Solutions LLC, a company providing IT staffing
      and solutions, since 1999, prior to which he was a partner in the accounting
      firm of Feldman, Gutterman, Meinberg & Co. Mr. Gutterman is a Certified
      Public Accountant.





Robert
      B.
      Machinist has been a director since August 2004. Mr. Machinist is
      currently a managing partner of M Capital, LLC, a private equity investment
      firm
      in Rye, New York. He also runs a private family investment company. From
      November 1998 until December 2001, Mr. Machinist served as
      managing director and head of investment banking for the Bank of New York and
      its Capital Markets division. From 1986 through November 1998,
      Mr. Machinist was president and one of the principal founders of
      Patricof & Co. Capital Corp. (and its successor companies), a
      multinational investment banking business. Mr. Machinist is also a director
      of Dobi Medical International, Inc., a publicly-held development stage
      company in the business of advanced medical technology imaging.




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            Statements**





A
      majority of our directors are “independent,” as defined under the rules of the
      Nasdaq Stock Market. Such independent directors are Messrs. Levy, Burstein,
      Gutterman and Machinist. Our directors hold office until the next annual meeting
      of stockholders and until their successors are elected and qualified.





**Executive
      Officers**




Officers
      are elected annually by the Board of Directors and serve at the direction of
      the
      Board of Directors. Two of our executive officers, Jeffrey L. Schwartz and
      Andrew Stollman, are also directors of our Company. Information with regard
      to
      such persons is set forth above under the heading "Directors."




The
      remaining executive officers are Mr. Daniel Harvey, Chief Financial Officer,
      and
      Mr. Richard Wentworth, Chief Operating Officer.





Mr.
      Harvey has been our Chief Financial Officer since January 1997. He joined us
      in
      September 1996. From November 1991 to August 1996, he was a Senior Manager
      with
      the accounting firm of Feldman, Gutterman, Meinberg & Co. Mr. Harvey is a
      Certified Public Accountant.





Mr.
      Wentworth has been our Chief Operating Officer since November 21, 2002. He
      initially joined us in 1998, and had served as our Vice President of Data
      Operations since January 2000. From November 1994 to 1999, Mr. Wentworth was
      the
      President and Chief Operating Officer of TIAC, a prominent New England based
      regional Internet Service Provider.





We
      have
      obtained "key man" life insurance in the amount of $1,000,000 on each of the
      lives of Jeffrey L. Schwartz and Andrew Stollman.




**Committees
      of the Board of Directors**




We
      have
      an Audit Committee, Compensation Committee and Nominating and Corporate
      Governance Committee.




*Audit
      Committee* .
      The
      functions of the Audit Committee are to recommend to the Board of Directors
      the
      engagement of the independent accountants, review the audit plan and results
      of
      the audit engagement, review the independence of the auditors and review the
      adequacy of our system of internal accounting controls. The current members
      of
      the Audit Committee are Messrs. Gutterman, Burstein and Machinist, and the
      Board
      has determined that they are each “independent” (as that term is defined under
      the applicable rules of the Nasdaq Stock Market), and are each able to read
      and
      understand fundamental financial statements. Mr. Gutterman is the Chairman
      of
      the Audit Committee and possesses the financial expertise required under Rule
      401(h) of Regulation SK of the Securities Act of 1933, as amended (the “Act”),
      and NASD Rule 4350(d)(2). He is further “independent,” as that term is defined
      under Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
      1934, as amended (the “Exchange Act”). We will, in the future, continue to have
      (i) an Audit Committee of at lease three members comprised solely of independent
      directors, each of whom will be able to read and understand fundamental
      financial statements (or will become able to do so within a reasonable period
      of
      time after his or her appointment); and (ii) at least one member of the Audit
      Committee that will possess the financial expertise required under the
      applicable rules of the Nasdaq Stock Market. Our Board adopted a written charter
      for the Audit Committee (a copy of which was annexed as Appendix A to the Proxy
      Statement used in connection with our September 21, 2004 Annual Meeting of
      Stockholders) and the Audit Committee reviews and reassesses the adequacy of
      that charter on an annual basis.




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            Statements**





*Compensation
      Committee* .
      The
      functions of the Compensation Committee are to make recommendations to the
      Board
      regarding compensation of management employees and to administer plans and
      programs relating to employees benefits, incentives, compensation and awards
      under our Employee Incentive Plan. Messrs. Burstein (Chairman) and Gutterman
      are
      the current members of the Compensation Committee. The Board has determined
      that
      each of them is “independent,” as defined under the applicable rules of the
      Nasdaq Stock Market.





*Nominating
      and Corporate Governance Committee* .
      The
      functions of the Nominating and Corporate Governance Committee are to develop
      our corporate governance system and to review proposed new members of our board
      of directors, including those recommended by our stockholders. Messrs. Levy
      (Chairman), Burstein and Machinist are the current members of our Nominating
      and
      Corporate Governance Committee. The Nominating and Corporate Governance
      Committee operates pursuant to a written charter adopted by the Board. The
      full
      text of the charter is available on our website at *www.traffixinc.com* *.* The
      Board
      has determined that each member of this Committee is “independent,” as defined
      under the applicable rules of the Nasdaq Stock Market. **





The
      Nominating and Corporate Governance Committee will review, on an annual basis,
      the composition of our Board of Directors and the ability of its current members
      to continue effectively as directors for the upcoming fiscal year. In the
      ordinary course, absent special circumstances or a change in the criteria for
      Board membership, the Nominating and Corporate Governance Committee will
      renominate incumbent directors who continue to be qualified for Board service
      and are willing to continue as directors. If the Committee thinks it in our
      best
      interests to nominate a new individual for director in connection with an annual
      meeting of stockholders, or if a vacancy on the Board occurs between annual
      stockholder meetings, the Committee will seek out potential candidates for
      Board
      appointment who meet the criteria for selection as a nominee and have the
      specific qualities or skills being sought. Director candidates will be selected
      based on input from members of the Board, our senior management and, if the
      Committee deems appropriate, a third-party search firm. The Nominating and
      Corporate Governance Committee will evaluate each candidate’s qualifications and
      check relevant references and each candidate will be interviewed by at least
      one
      member of the Committee. Candidates meriting serious consideration will meet
      with all members of the Board. Based on this input, the Nominating and Corporate
      Governance Committee will evaluate whether a prospective candidate is qualified
      to serve as a director and whether the Committee should recommend to the Board
      that this candidate be appointed to fill a current vacancy on the Board, or
      presented for the approval of the stockholders, as appropriate.





**Stockholder
      Communications**





Stockholders
      interested in communication with our Board may do so by writing to any or all
      directors, care of our Chief Financial Officer, at our principal executive
      offices. Our Chief Financial Officer will log in all stockholder correspondence
      and forward to the director addressee(s) all communications that, in his
      judgment, are appropriate for consideration by the directors. Any director
      may
      review the correspondence log and request copies of any correspondence. Examples
      of communications that would be considered inappropriate for consideration
      by
      the directors include, but are not limited to, commercial solicitations,
      trivial, obscene, or profane items, administrative matters, ordinary business
      matters, or personal grievances. Correspondence that is not appropriate for
      Board review will be handled by our Chief Financial Officer. All appropriate
      matters pertaining to accounting or internal controls will be brought promptly
      to the attention of our Audit Committee Chair.




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            Statements**





Stockholder
      recommendations for director nominees are welcome and should be sent to our
      Chief Financial Officer, who will forward such recommendations to our Nominating
      and Corporate Governance Committee, and should include the following
      information: (a) all information relating to each nominee that is required
      to be
      disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934
      (including such person’s written consent to being named in the proxy statement
      as a nominee and to serving as a director if elected); (b) the names and
      addresses of the stockholders making the nomination and the number of shares
      of
      our common stock which are owned beneficially and of record by such nominee,
      and
      must be submitted in the appropriate time frame. The Nominating and Corporate
      Governance Committee will evaluate candidates recommended by stockholders in
      the
      same manner as candidates recommended by other sources, using criteria, if
      any,
      approved by the Board form time to time. Our stockholder communication policy
      may be amended at any time with the consent of our Nominating and Corporate
      Governance Committee.





**Code
      of Ethics**





We
      have a
      Code of Ethics that applies to all our employees, officers and directors. Such
      code has been posted on our website, www.traffixinc.com. We will disclose when
      there have been waivers of, or amendments to, such Code as required by the
      rules
      and regulations promulgated by the Securities and Exchange Commission and/or
      Nasdaq.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





To
      the
      best of our knowledge, during the fiscal year ended November 30, 2005, (i)
      Messrs Burstein, Gutterman, Levy, Machinist and Skala untimely filed one report
      on Form 4, each reporting one transaction; (ii) Mr. Harvey untimely filed 3
      reports on Form 4, each reporting 4 late transactions; (iii) Mr. Schwartz
      untimely filed 3 reports on Form 4, each reporting 3 late transactions, one
      report on Form 4 reporting 4 late transactions and one
      report on Form 4, reporting one late transaction; and (iv) Joshua B. Gillon, a former executive
      officer of the Company who resigned in March 2005, untimely filed one
      report on Form 4, reporting 10 late transactions, and failed to report one
      report on Form 5. These individuals were executive officers, directors and/or
      beneficial owners of more than 10% of our Common Stock during the fiscal year
      ended November 30, 2005. To the best of our knowledge, all other Forms 3, 4
      and
      5 required to be filed during the fiscal year ended November 30, 2005 were
      done
      so on a timely basis.





**Item
      11.****EXECUTIVE
      COMPENSATION**





The
      following table sets forth the executive compensation paid during the three
      fiscal years ended November 30, 2005, 2004 and 2003 for (i) our Chief Executive
      Officer; (ii) our four most highly compensated executive officers (other than
      the Chief Executive Officer) whose cash compensation for the fiscal year ended
      November 30, 2005 exceeded $100,000; and (iii) up to two additional individuals
      for whom disclosure would have been provided under the above clause (ii) but
      for
      the fact that the individuals were not serving as executive officers at the
      end
      of the last completed fiscal year (the "Named Officers").




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            Statements**




Annual
                Compensation Awards
            
            
            
            Long
                Term Compensation Payouts(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)Other
            
            
            
            Securities
            
            
            
            All
                OtherAnnual
            
            Restricted
            
            Underlying
            
            
            
            Compen-Name
                and
            
            
            
            Salary
            
            Bonus
            
            Compensa-
            
            Stock
            
            Options
            
            Plan
            
            sationPrincipal
                Position
            
            Year
            
            ($)
            
            ($)
            
            tion($)
            
            Awards
            
            (#)
            
            Payouts
                ($)
            
            ($)(3)Jeffrey
                L. Schwartz
            
            
            2005
            
            $
            605,000
            
            $
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            20,779Chairman
                and
            
            
            2004
            
            $
            605,000
            
            $
            —
            
            
            —
            
            
            —
            
            
            185,000
            
            
            —
            
            $
            29,625Chief
                Executive
            
            
            2003
            
            $
            550,000
            
            $
            50,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —OfficerAndrew
                Stollman
            
            
            2005
            
            $
            544,500
            
            $
            30,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            18,793President
                and
            
            
            2004
            
            $
            544,500
            
            $
            —
            
            
            —
            
            
            —
            
            
            405,000
            
            
            —
            
            $
            22,928Secretary
            
            
            2003
            
            $
            495,000
            
            $
            50,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Daniel
                Harvey
            
            
            2005
            
            $
            213,000
            
            $
            24,000
            
            
            —
            
            
            —
            
            
            40,000
            
            
            —
            
            $
            12,000Chief
                Financial
            
            
            2004
            
            $
            208,667
            
            $
            24,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            9,000Officer
            
            
            2003
            
            $
            200,000
            
            $
            20,000
            
            
            —
            
            
            —
            
            
            40,000
            
            
            —
            
            
            —Richard
                Wentworth
            
            
            2005
            
            $
            213,539
            
            $
            25,000
            
            
            —
            
            
            —
            
            
            50,000
            
            
            —
            
            
            —Chief
                Operating
            
            
            2004
            
            $
            200,000
            
            $
            25,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Officer
                (1)
            
            
            2003
            
            $
            200,000
            
            $
            50,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Joshua
                B. Gillon, Esq.
            
            
            2005
            
            $
            106,176
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Former
                Executive Vice Presidentand
                General
            
            
            2004
            
            $
            250,000
            
            $
            10,000
            
            
            —
            
            
            —
            
            
            137,500
            
            
            —
            
            
            —Counsel
                (2)
            
            
            2003
            
            $
            250,000
            
            $
            20,000
            
            
            —
            
            
            —
            
            
            50,000
            
            
            —
            
            
            —





(1)
            Effective
                January 8, 2005, Mr. Wentworth’s salary became $216,000 per annum.


(2)
            Mr.
                Gillon resigned as an executive officer and employee in March 2005.


(3)
            Consists
                of medical insurance reimbursements and auto allowance payments in
                the
                case of Messrs. Schwartz and Stollman, and auto allowance payments
                in the
                case of Mr. Harvey







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            Statements**





The
      following table sets forth certain information regarding the granting of options
      to the Named Officers during the fiscal year ended November 30,
      2005.





**Option
      Grants in Last Fiscal Year**


**Potential****Realizable****Value
                at Assumed****Annual****Rates
                of Stock****Price
                Appreciation****for
                Option****Individual
                Grants**
            
            **Term
                (2)****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)**
            
            **(f)**
            
            **(g)****Number
                of****Securities**
            
            **%
                of Total****Underlying**
            
            **Options
                Granted**
            
            **Exercise
                or****Options**
            
            **to
                Employees in**
            
            **Base
                Price**
            
            **Expiration****Name**
            
            **Granted
                (#)**
            
            **Fiscal
                Year (1)**
            
            **($/Share)**
            
            **Date**
            
            **5%($)**
            
            **10%($)**Daniel
                Harvey
            
            
            20,000(3
            )
            
            2.87
            %
            $
            6.14
            
            
            12/09/2009
            
            $
            33,930
            
            $
            74,970Daniel
                Harvey
            
            
            20,000(4
            )
            
            2.87
            %
            $
            5.60
            
            
            11/28/2010
            
            $
            30,940
            
            $
            68,380Richard
                Wentworth
            
            
            25,000(3
            )
            
            3.59
            %
            $
            6.14
            
            
            12/09/2009
            
            $
            42,410
            
            $
            93,710Richard
                Wentworth
            
            
            25,000(4
            )
            
            3.59
            %
            $
            5.60
            
            
            11/28/2010
            
            $
            38,680
            
            $
            85,470





(1)
            Options
                to purchase a total of 696,500 shares of Common Stock were granted
                to our
                employees and consultants, including the Named Officers, during the
                fiscal
                year ended November 30, 2005.


(2)
            Based
                upon the closing price of the Common Stock, as listed by the Nasdaq
                National Market, on the date of grant of the respective
                options.


(3)
            One-third
                (1/3) of these options become exercisable on the grant date, and
                one-third
                (1/3) on each of the one- and two-year anniversaries of their date
                of
                grant.


(4)
            These
                options vested immediately upon
                grant.






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The
      following table sets forth certain information regarding options exercised
      and
      exercisable during the fiscal year ended November 30, 2005 and the value of
      the
      options held as of November 30, 2005 by the Named Officers.





**Aggregated
      Option Exercises In Last Fiscal Year**


**and
      Fiscal Year-End Option Value**


**(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)****Number
                of Securities**
            
            **Value
                of Unexercised****Underlying
                Unexercised**
            
            **In-the-Money
                Options****Options
                At Fiscal Year-End (#)**
            
            **at
                Fiscal Year-End (1)($)****Shares
                Acquired**
            
            **Value****Name**
            
            **On
                Exercise(#**)
            
            **Realized
                ($)**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Jeffrey
                L. Schwartz
            
            
            8,750
            
            $
            36,138
            
            
            430,000
            
            
            —
            
            $
            428,500
            
            $
            —Andrew
                Stollman
            
            
            8,750
            
            
            36,400
            
            
            525,000
            
            
            220,000
            
            
            385,650
            
            
            —Daniel
                Harvey
            
            
            88,099
            
            
            180,037
            
            
            26,666
            
            
            13,334
            
            
            —
            
            
            —Richard
                Wentworth
            
            
            —
            
            
            —
            
            
            128,333
            
            
            16,667
            
            
            112,950
            
            
            —Joshua
                B. Gillon
            
            
            325,000
            
            
            710,541
            
            
            (2
            )
            
            (2
            )
            
            (2
            )
            
            (2
            )





(1)
              The
                  product of (x) the difference between $5.46 (the closing price
                  of our
                  Common Stock at November 30, 2005, as reported by Nasdaq) and the
                  exercise
                  price of the unexercised options, multiplied by (y) the number
                  of
                  unexercised options.


(2)
              Mr.
                  Gillon’s options expired upon his resignation during March 2005.





**Board
      Compensation**





As
      a
      result of our policy to compensate non-employee directors for their services,
      our 1996 Employee Incentive Plan, as amended and restated (the "Plan"), provides
      for an automatic one-time grant to all non-employee directors of options to
      purchase 25,000 shares of Common Stock and for additional automatic quarterly
      grants of options to purchase 6,250 shares of Common Stock. The exercise prices
      for all of such non-employee director options are the market value of the Common
      Stock on their date of grant.





In
      addition, for each attended meeting of the Audit Committee, the Chairman
      receives $4,000 and each other member receives $2,000, and for each attended
      meting of the Compensation Committee and the Nominating and Corporate Governance
      Committee, the Chairman receives $2,000 and each other member receives
      $1,000.




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            Statements**





**Employment
      Agreements**




*Jeffrey
      L. Schwartz*




The
        employment agreement with Jeffrey L. Schwartz, our Chairman and Chief Executive
        Officer, expired on November 30, 2005. Mr. Schwartz continues to serve as
        our
        Chairman and Chief Executive Officer as an employee-at-will, but is in the
        process of negotiating with our Board the terms of a new employment
        agreement.





*Andrew
      Stollman*





We
      entered into an employment agreement, effective December 1, 2001, with
      Andrew Stollman, which agreement was orally amended on June 3, 2004 (the
“First Amendment”).  On May 10, 2005, the First Amendment was reduced
      to writing and we executed a second amendment to Mr. Stollman’s employment
      agreement (the “Second Amendment”).  The employment agreement, as amended
      by the First Amendment and Second Amendment, now expires on November 30,
      2007 and further provides that Mr. Stollman (i) is employed as our
      President and Secretary; (ii) was paid for the fiscal year ended
      November 30, 2005, and will be paid for all fiscal years remaining under
      the term, $544,500 per annum; (iii) will receive bonuses upon our Company’s
      achievement of certain pre-tax income milestones and (as added by the Second
      Amendment) certain EBITDA (as defined) milestones, as well as discretionary
      bonuses subject to approval of our Board of Directors; (iv) upon the
      commencement of the agreement on December 1, 2001, was issued a ten-year
      option to acquire 105,000 shares of our Common Stock at an exercise price of
      $5.70 per share; (v) upon the execution of the First Amendment, was issued
      a ten-year option to acquire 405,000 shares of our Common Stock at an exercise
      price of $7.34 per share, 110,000 shares of which failed to vest and the
      remaining 295,000 shares of which vest as follows:




(a)
            75,000
                shares vested immediately;




(b)
            110,000
                shares will vest if we have Operating Cash Flow (as defined in the
                Second
                Amendment) for Fiscal 2006 equal to or greater than $4.65 million;
                and




(c)
            110,000
                shares will vest if we have Operating Cash Flow for Fiscal 2007 equal
                to
                or greater than $5.29 million.






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(vi)  agreed
      not to compete or engage in a business competitive with our business during
      the
      term of the agreement and for a period of one year thereafter; (vii) if his
      employment is terminated other than as a result of a “For Cause Event” (as
      defined in the original 2001 employment agreement), will be entitled to receive
      additional compensation and other consideration, all as more fully described
      in
      the original 2001 employment agreement; and (viii) if his employment is
      terminated as a result of a “Change in Control” (as defined in the original 2001
      employment agreement), will be entitled to receive a one-time payment in an
      amount equal to 2.99 times his “base amount” determined in accordance with the
      applicable provisions of the Internal Revenue Code.





The
      foregoing is only a summary of the material terms of our employment agreements
      with the Named Officers. For a complete description, copies of such agreements
      are annexed hereto in their entirety as exhibits or are otherwise incorporated
      herein by reference.





**Compensation
      Committee Interlocks and Insider Participation**





Messrs.
      Burstein and Gutterman
      are the members of our Compensation Committee. None of our executive officers
      has served as a director or member of a compensation committee (or other board
      committee performing equivalent functions) of any other entity, one of whose
      executive officers served as a director or a member of our Compensation
      Committee.




**Item
      12.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth information, as of February 24 , 2006,
      based upon information obtained from the persons named below, regarding
      beneficial ownership of our Common Stock by (i) each person who is known by
      us to own beneficially more than 5% of the outstanding shares of our Common
      Stock, (ii) each director of our Company, (iii) each of the Named
      Officers, and (iv) all executive officers and directors of our Company as a
      group.


Name
                  and Address of Beneficial Owner (1)
              
              Number
                  of SharesBeneficially Owned (2)
              
              Percentof
                  Class (2)Jeffrey
                  L. Schwartz
              
              
              2,123,615
                  (3
              )
              
              14.47
              %Andrew
                  Stollman
              
              
              1,160,000
                  (4
              )
              
              7.86Dimensional
                  Fund Advisors, Inc.
                1299
                    Ocean Avenue
                  11th
                    Floor
                  Santa
                    Monica, CA 92651
              
              
              990,989
                  (5
              )
              
              6.96Al
                  Frank Asset Management, Inc.
                32392
                  Coast Highway, Suite 260
                Laguna
                  Beach, Ca. 92651
              
              
              810,046
                  (6
              )
              
              5.69Edwin
                  A. Levy
              
              
              223,386
                  (7
              )
              
              1.55570
                  Lexington AvenueNew
                  York, NY 10022Murray
                  L. Skala
              
              
              197,750
                  (8
              )
              
              1.37750
                  Lexington AvenueNew
                  York, NY 10022Richard
                  Wentworth
              
              
              136,666
                  (9
              )
              
              *Lawrence
                  Burstein
              
              
              125,000
                  (10
              )
              
              *245
                  Fifth AvenueNew
                  York, NY 10016Mark
                  Gutterman
                115
                  Broadway
                2nd
                  Floor
                New
                  York, NY 10006
              
              
              81,250
                  (11
              )
              
              *Robert
                  Machinist
                555
                  Theodore Fremd Avenue, Suite B302
                Rye,
                  NY 10580
              
              
              62,500
                  (12
              )
              
              *Daniel
                  Harvey
              
              
              33,333
                  (13
              )
              
              *Joshua
                  B. Gillon, Esq.
              
              
              0
                  (14
              )
              
              —All
                    executive officers anddirectors
                    as a group (9 persons)
              
              
              4,143,500
                  (15
              )
              
              26.03
              %





*
            Less
                than 1% of our outstanding shares.


(1)
              Unless
                  otherwise provided, such person's address is c/o Traffix, Inc.,
                  One Blue
                  Hill Plaza, Pearl River, New York
                  10965.


(2)
              The
                  number of shares of Common Stock beneficially owned by each person
                  or
                  entity is determined under the rules promulgated by the Securities
                  and
                  Exchange Commission (the "Commission"). Under such rules, beneficial
                  ownership includes any shares as to which the person or entity
                  has sole or
                  shared voting power or investment power. The percentage of our
                  outstanding
                  shares is calculated by including among the shares owned by such
                  person
                  any shares which such person or entity has the right to acquire
                  within 60
                  days after February****24,
                  2006. The inclusion herein of any shares deemed beneficially owned
                  does
                  not constitute an admission of beneficial ownership of such
                  shares.


(3)
                Includes
                    430,000 shares of Common Stock issuable upon the exercise of
                    options held
                    by Mr. Schwartz.Does
                    not include 2,330 shares held by a trust for the benefit of Mr.
                    Schwartz’s
                    child of which Mr. Schwartz’s spouse is the sole
                    trustee.


(4)
              Includes
                  525,000 shares of Common Stock issuable upon the exercise of options
                  held
                  by Mr. Stollman.


(5)
              All
                  the information presented with respect to this beneficial owner
                  was
                  extracted solely from the Schedule 13G filed on February 6,
                  2006.


(6)
              Possesses
                  sole voting power with respect to 476,509.32 of such shares and
                  sole
                  dispositive power with respect to all of such shares. All the information
                  presented with respect to this beneficial owner was extracted soley
                  from
                  the Schedule 13G filed on February 14,
                  2006.


(7)
              Represents
                  25,100 shares of Common Stock held by a fund of which Mr. Levy
                  is the
                  General Partner and 198,286 shares of Common Stock issuable upon
                  the
                  exercise of options held by Mr.
                  Levy.


(8)
              Includes
                  193,750 shares of Common Stock issuable upon the exercise of options
                  held
                  by Mr. Skala.


(9)
              Represents
                  shares of Common Stock issuable upon the exercise of options held
                  by Mr.
                  Wentworth.


(10)
              Represents
                  shares of Common Stock issuable upon the exercise of options held
                  by Mr.
                  Burstein.


(11)
              Represents
                  shares of Common Stock issuable upon the exercise of options held
                  by Mr.
                  Gutterman.


(12)
              Represents
                  shares of Common Stock issuable upon the exercise of options held
                  by Mr.
                  Machinist.


(13)
              Represents
                  shares of Common Stock issuable upon the exercise of options held
                  by Mr.
                  Harvey.


(14)
              Mr.
                  Gillon resigned as an executive officer in March
                  2005.


(15)
              Includes
                  1,675,785 shares of Common Stock issuable upon the exercise of
                  options
                  held by our executive officers and directors. See footnotes (3)
                  and (4)
                  and (7) through (13), above.






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**Equity
      Compensation Plan Information**





The
      table
      below sets forth the following information as of the fiscal year ended November
      30, 2005 for (i) all compensation plans previously approved by our stockholders
      and (ii) all compensation plans not previously approved by our stockholders,
      if
      any:




(a)
              the
                  number of securities to be issued upon the exercise of outstanding
                  options, warrants and rights;
 
 (b)
              the
                  weighted-average exercise price of such outstanding options, warrants
                  and
                  rights;
 
 (c)
              other
                  than securities to be issued upon the exercise of such outstanding
                  options, warrants and rights, the number of securities remaining
                  available
                  for future issuance under the plans.


Plan
              category
            
            
            Number of
              securities
                to be
              issued upon exercise
              of outstanding options,
              warrants
                and rights
              (
                a
                )
            
            
            Weighted-average
              exercise
                price of
              outstanding options,
              warrants
                and rights
              (
                b
                )
            
            
            Number
                of
              securities remaining
                available for future
              issuance under equity
                compensation plans
              (excluding
                securities
              reflected in column (a))
              (
                c
                )Equity
                compensation plans approved by security holders
            
            
            3,140,359
            
            $
            5.65
            
            
            1,177,897Equity
                compensation plans not approved by security holders
            
            
            0
            
            $
            0.00
            
            
            0Total
            
            
            3,140,359
            
            $
            5.65
            
            
            1,177,897




Equity
      compensation plans approved by our stockholders include the 1995 Employee Stock
      Option Plan and the Sixth Amended and Restated 1996 Employee Incentive
      Plan.





**Item
      13.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. We incurred approximately $0.87 million in legal fees (exclusive
      of
      disbursements) from FKIWSBR during the year ended November 30, 2005, of which
      $0.70 million was expensed, and $0.17 million was capitalized in the Hot Rocket
      acquisition. The $0.70 million of FKIWSBR expense was then reduced by $0.36
      million, representing amounts recovered from our insurance providers under
      the
      terms of their respective coverage provisions. FKIWSBR continues to provide
      services for us during our current fiscal year. Its fees are based primarily
      on
      hourly rates. We believe our relationship with such firm is on terms no less
      favorable to us than could have been obtained from unaffiliated third
      parties.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





Before
      PricewaterhouseCoopers LLP is engaged by us to render audit or non-audit
      services, where required by the rules and regulations promulgated by the
      Securities and Exchange Commission and/or Nasdaq, such engagement is approved
      by
      the Audit Committee. The following are the fees billed us by
      PricewaterhouseCoopers LLP for services rendered thereby during the fiscal
      years
      ended November 30, 2005 and 2004:





2005
            
            2004Audit
                Fees
            
            $
            404,000
            
            $
            250,000Audit
                - Related Fees
            
            $
            4,000
            
            $
            15,250Tax
                Fees
            
            $
            50,604
            
            $
            70,617All
                Other Fees
            
            $
            76,500
            
            $
            77,500






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            Statements**




*Audit
      Fees* consist
      of the aggregate fees billed for professional services rendered for the audit
      of
      our annual financial statements and the reviews of the financial statements
      included in our Forms 10-Q and for any other services that are normally provided
      by the auditors in connection with our statutory and regulatory filings or
      engagements.





*Audit
      Related Fees* consist
      of the aggregate fees billed for professional services rendered for assurance
      and related services that were reasonably related to the performance of the
      audit or review of our financial statements and were not otherwise included
      in
      Audit Fees. Included in such Audit Related Fees were fees incurred in connection
      with the auditors' review of financial information included in our filed
      registration statements.





*Tax
      Fees* consist
      of the aggregate fees billed for professional services rendered for tax
      compliance, tax advice and tax planning. Included in such Tax Fees were fees
      incurred for tax planning services and state and local tax advice.





*All
      Other Fees* consist
      of the aggregate fees billed for products and services provided by the auditors
      and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.





Our
      Audit
      Committee has considered whether the provisions of the non-audit services
      described above is compatible with maintaining our auditor's independence and
      determined that such services are appropriate.




The
      Audit
      Committee does not formally approve specific amounts to be spent on non-audit
      related services which in the aggregate do not exceed amounts to be spent on
      audit related services. In determining the reasonableness of audit fees, the
      Audit Committee considers historical amounts paid and the scope of services
      to
      be performed.





**PART
      IV**





**Item
      15.****EXHIBITS
      and FINANCIAL STATEMENT SCHEDULES**





**(a)**
            **Financial
                Statements and Financial Statement Schedules****.**





*(i)*
            *Financial
                Statements:*




See
      Index
      to Financial Statements.





*(ii)*
            *Financial
                Statement Schedules*





Schedule
      of Valuation and Qualifying Accounts and Reserves





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            Statements**




All
      other
      financial statement schedules have been omitted since either (i) the schedule
      or
      condition requiring a schedule is not applicable or (ii) the information
      required by such schedule is contained in the Consolidated Financial Statements
      and Notes thereto or in Management's Discussion and Analysis of Financial
      Condition and Results of Operation.




**(b)**
              **Exhibits****.**





3.1.1
            
            Articles
                of Incorporation of the Company, as amended.(1)3.1.2
            
            Amendment
                to the Articles of Incorporation of the Company.(2)3.2
            
            Bylaws
                of the Company.(3)10.1
            
            Sixth
                Amended and Restated 1996 Employee Incentive Plan.(4)10.2.1
            
            Lease
              of the Company's offices at One Blue Hill Plaza, Pearl River, New
              York.(5)10.2.2
            *
            Amendment
                to Lease of the Company's offices at One Blue Hill Plaza, Pearl River,
                New
                York.10.3.1
            
            December 1,
                2001 Employment Agreement by and between the Company and Andrew
                Stollman(6)10.3.2
            
            Amendment
                No. 1 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)10.3.3
            
            Amendment
                No. 2 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)14.1
            
            Code
                of Ethics(8)21.1
            *
            Subsidiaries
                of the Company31.1
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Jeffrey L. Schwartz31.2
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Daniel Harvey32.1
            *
            Section 1350
                Certification of Jeffrey L. Schwartz32.2
            *
            Section 1350
                Certification of Daniel Harvey





*
            Filed
                herewith.


(1)
            Filed
                as an Exhibit to the Company's Registration Statement on Form 8-A
                dated October 23, 1995 and incorporated herein by reference.


(2)
            Filed
                as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
                fiscal quarter ended August 31, 1998 and incorporated herein by
                reference.


(3)
            Filed
                as an Exhibit to the Company's Registration Statement on Form S-1
                dated September 6, 1995 (File No. 33-96632) and incorporated
                herein by reference.


(4)
            Filed
                as an Exhibit to the Company's Proxy Statement, Schedule 14A, filed
                with the Commission on August 12, 2005 and incorporated herein by
                reference.


(5)
            Filed
                as an Exhibit to the Company's Current Report on Form 8-K dated
                December 26, 2000 and incorporated herein by reference.


(6)
            Filed
                as an Exhibit to the Company's Form 10-K for the year ended
                November 30, 2001 and incorporated herein by reference.


(7)
            Filed
                as an Exhibit to the Company's Current Report on Form 8-K dated May
                12, 2005 and incorporated herein by reference.


(8)
            Filed
                as an Exhibit to the Company's Form 10-K for the year ended
                November 30, 2003 and incorporated herein by reference.








55
 **Back
            to Table of Contents**
 **Index
            to Financial
            Statements**





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned thereunto duly authorized.




**TRAFFIX,
              INC.**Dated: February
              28, 2006
            By:
            /s/ JEFFREY
              L. SCHWARTZName:  
                Jeffrey L. Schwartz
              Title:    
                Chairman and CEO





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                Jeffrey L. Schwartz
            
            Chairman
                and ChiefExecutive
                Officer
            
            February
                28, 2006Jeffrey
              L. Schwartz
            
            (Principal
Executive
              Officer)/s/
                Daniel Harvey
            
            Chief
                Financial Officer
            
            February
                28, 2006Daniel
              Harvey
            
            (Principal
              Financial andAccounting
              Officer)/s/
                Andrew Stollman
            
            President,Secretary
                and Director
            
            February
                28, 2006Andrew
              Stollman/s/
                Murray L. Skala
            
            Director
            
            February
                28, 2006Murray
              L. Skala/s/
                Edwin A. Levy
            
            Director
            
            February
                28, 2006Edwin
              A. Levy/s/
                Lawrence Burstein
            
            Director
            
            February
                28, 2006Lawrence
              Burstein/s/
                Mark Gutterman
            
            Director
            
            February
                28, 2006Mark
              Gutterman/s/
                Robert B. Machinist
            
            Director
            
            February
                28, 2006Robert
              B. Machinist






56
 **Back
            to Table of Contents**
 **Index
            to Financial
            Statements**




EXHIBIT
      INDEX


3.1.1
            
            Articles
                of Incorporation of the Company, as amended.(1)3.1.2
            
            Amendment
                to the Articles of Incorporation of the Company.(2)3.2
            
            Bylaws
                of the Company.(3)10.1
            
            Sixth
                Amended and Restated 1996 Employee Incentive Plan.(4)10.2.1
            
            Lease of the Company's offices at One Blue
              Hill Plaza, Pearl River, New York.(5)10.2.2
            *
            Amendment
                to Lease of the Company's offices at One Blue Hill Plaza, Pearl River,
                New
                York.10.3.1
            
            December 1,
                2001 Employment Agreement by and between the Company and Andrew
                Stollman(6)10.3.2
            
            Amendment
                No. 1 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)10.3.3
            
            Amendment
                No. 2 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)14.1
            
            Code
                of Ethics(8)21.1
            *
            Subsidiaries
                of the Company31.1
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Jeffrey L. Schwartz31.2
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Daniel Harvey32.1
            *
            Section 1350
                Certification of Jeffrey L. Schwartz32.2
            *
            Section 1350
                Certification of Daniel Harvey


*
              Filed
                  herewith.
 (1)
              Filed
                  as an Exhibit to the Company's Registration Statement on Form 8-A
                  dated October 23, 1995 and incorporated herein by reference.
 (2)
              Filed
                  as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
                  fiscal quarter ended August 31, 1998 and incorporated herein by
                  reference.
 (3)
              Filed
                  as an Exhibit to the Company's Registration Statement on Form S-1
                  dated September 6, 1995 (File No. 33-96632) and incorporated
                  herein by reference.
 (4)
              Filed
                  as an Exhibit to the Company's Proxy Statement, Schedule 14A, filed
                  with the Commission on August 12, 2005 and incorporated herein by
                  reference.
 (5)
              Filed
                  as an Exhibit to the Company's Current Report on Form 8-K dated
                  December 26, 2000 and incorporated herein by reference.
 (6)
              Filed
                  as an Exhibit to the Company's Form 10-K for the year ended
                  November 30, 2001 and incorporated herein by reference.
 (7)
              Filed
                  as an Exhibit to the Company's Current Report on Form 8-K dated May
                  12, 2005 and incorporated herein by reference.
 (8)
              Filed
                  as an Exhibit to the Company's Form 10-K for the year ended
                  November 30, 2003 and incorporated herein by reference.






57
 **Back
            to Table of Contents**
 **Index
            to Financial
            Statements**




**Traffix,
        Inc.**
 **and
        Subsidiaries**
 **Consolidated
        Financial Statements**
 **as
        of November 30, 2005 and 2004**
 **and
        for each of the three years in the**
 **period
        ended November 30, 2005**
  **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Index
          to Consolidated Financial Statements and Financial Statement
          Schedule**
 **Page**Report
                  of Independent Registered Public Accounting
                  Firm
              
              F-1Consolidated
                  Balance Sheets as of November 30, 2005 and
                  2004
              
              F-2Consolidated
                  Statements of Operations forthe
                  years ended November 30, 2005, 2004 and
                  2003
              
              F-3Consolidated
                  Statements of Shareholders' Equity for the years
                  ended November 30, 2005,2004
                  and 2003
              
              F-4Consolidated
                  Statements of Cash Flows for the years ended
                  November 30, 2005,2004
                  and 2003
              
              F-5
                  - F-6Notes
                  to Consolidated Financial
                  Statements
              
              F-7
                  - F-41Schedule
                  II - Valuation and Qualifying Accounts and
                  Reserves
              
              S-1
 
 
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  **Report
          of Independent Registered Public Accounting Firm**
 
 
 To
          the
          Board of Directors and Shareholders
 of
          Traffix, Inc. :
 
 
 In
          our
          opinion, the consolidated financial statements listed in the index appearing
          under Item 15(a)(1) present fairly, in all material respects, the financial
          position of Traffix, Inc. and its subsidiaries at November 30, 2005 and
          2004,
          and the results of their operations and their cash flows for each of the
          three
          years in the period ended November 30, 2005 in conformity with accounting
          principles generally accepted in the United States of America. In addition,
          in
          our opinion, the financial statement schedule listed in the index appearing
          under Item 15(a)(2) present fairly, in all material respects, the information
          set forth therein when read in conjunction with the related consolidated
          financial statements. These financial statements and financial statement
          schedule are the responsibility of the Company's management. Our responsibility
          is to express an opinion on these financial statements and financial statement
          schedule based on our audits. We conducted our audits of these statements
          in
          accordance with the standards of
          the Public
          Company Accounting Oversight Board  (United
          States). Those
          standards require that we plan and perform the audit to obtain reasonable
          assurance about whether the financial statements are free of material
          misstatement. An audit includes examining, on a test basis, evidence supporting
          the amounts and disclosures in the financial statements, assessing the
          accounting principles used and significant estimates made by management,
          and
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 
 PricewaterhouseCoopers
          LLP
 
 
 Florham
          Park, NJ
 February
          28, 2006
 F-1
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 
 ***Traffix,
        Inc. and Subsidiaries***
 **Consolidated
        Balance Sheets**
 **As
        of November 30, 2005 and 2004**
 **Assets**
              
              **2005**
              
              **2004**Current
                  assets:Cash
                  and cash equivalents
              
              $
              9,335,723
              
              $
              7,553,285Marketable
                  securities
              
              
              18,908,064
              
              
              28,251,348Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $1,025,661 and $691,229 in 2005 and 2004, respectively
              
              
              11,137,275
              
              
              4,744,220Deferred
                  income taxes
              
              
              1,379,877
              
              
              1,206,096Prepaid
                  expenses and other current assets
              
              
              1,078,621
              
              
              923,069**Total
                  current assets**
              
              
              41,839,560
              
              
              42,678,018Marketable
                securities
              
              
              2,662,905
              
              
              —Property
                  and equipment, at cost, net of accumulated depreciation
              
              
              2,317,690
              
              
              2,381,364Goodwill
              
              
              6,426,336
              
              
              4,231,054Other
                  intangibles, net
              
              
              2,538,223
              
              
              2,371,411Deferred
                  income taxes
              
              
              478,050
              
              
              296,663**Total
                  assets**
              
              $
              56,262,764
              
              $
              51,958,510**Liabilities**Current
                  liabilities:Accounts
                  payable
              
              $
              5,426,797
              
              $
              3,673,789Accrued
                  expenses
              
              
              4,269,995
              
              
              3,450,798Reserve
                  for customer chargebacks
              
              
              302,175
              
              
              377,535Due
                  to related parties
              
              
              110,076
              
              
              311,341Income
                  taxes payable
              
              
              1,009,880
              
              
              306,333**Total
                  current liabilities**
              
              
              11,118,923
              
              
              8,119,796Deferred
                  income taxes
              
              
              302,465
              
              
              316,279**Total
                  liabilities**
              
              
              11,421,388
              
              
              8,436,075Minority
                  interest
              
              
              365,637
              
              
              —Commitments
                  and contingencies (Notes 2, 10, 11 and 16)**Shareholders'
                  equity**Preferred
                  stock - $.001 par value; 1,000,000 shares authorized;none
                  issued and outstanding
              
              
              —
              
              
              —Common
                  stock - $.001 par value; authorized 50,000,000 shares;
                  issued14,208,486
                  shares and 13,510,605 shares, respectively
              
              
              14,208
              
              
              13,510Additional
                  paid-in capital
              
              
              43,584,229
              
              
              41,309,652Retained
                  earnings
              
              
              —
              
              
              1,052,277Accumulated
                  other comprehensive income
              
              
              877,302
              
              
              1,146,996**Total
                  shareholders' equity**
              
              
              44,475,739
              
              
              43,522,435**Total
                  liabilities and shareholders' equity**
              
              $
              56,262,764
              
              $
              51,958,510
 See
        acompanying notes to consolidated financial statements.
   F-2
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Consolidated
          Statements of Operations**
 **For
          the years ended November 30, 2005, 2004 and 2003**
 **2005**
                
                **2004**
                
                **2003**Net
                    revenue
                
                $
                62,856,982
                
                $
                37,281,214
                
                $
                32,388,852Cost
                    of sales
                
                
                41,052,260
                
                
                22,052,610
                
                
                13,080,555**Gross
                    profit**
                
                
                21,804,722
                
                
                15,228,604
                
                
                19,308,297Selling
                    expenses
                
                
                4,016,603
                
                
                2,323,510
                
                
                6,495,924General
                    and administrative expenses
                
                
                15,911,330
                
                
                12,832,239
                
                
                13,646,524Bad
                    debt (recoveries) expense
                
                
                (403,186
                )
                
                406,699
                
                
                576,350**Income
                    (loss) from operations**
                
                
                2,279,975
                
                
                (333,844
                )
                
                (1,410,501
                )Other
                    income (expense):Interest
                    income and dividends, net
                
                
                957,069
                
                
                544,153
                
                
                479,934Realized
                    gains on marketable securities
                
                
                561,359
                
                
                25,490
                
                
                19,730Realized
                    gain on sale of subsidiary
                
                
                195,000
                
                
                784,900
                
                
                1,375,801Other
                    non-operating income (expense)
                
                
                (28,076
                )
                
                398,118
                
                
                (54,068
                )Minority
                    interest in (income) loss of consolidated subsidiary
                
                
                (494,533
                )
                
                —
                
                
                (137,567
                )**Income
                      before provision****for
                      income taxes**
                
                
                3,470,794
                
                
                1,418,817
                
                
                273,329Provision
                    (benefit) for income taxes
                
                
                1,042,637
                
                
                404,603
                
                
                (147,571
                )**Net
                    income**
                
                $
                2,428,157
                
                $
                1,014,214
                
                $
                420,900Basic
                    earnings per share (Note 3):Net
                    income
                
                $
                0.17
                
                $
                0.08
                
                $
                0.03Weighted
                    average shares outstanding
                
                
                13,973,899
                
                
                13,257,869
                
                
                12,776,295Diluted
                    earnings per share (Note 3):Net
                    income
                
                $
                0.17
                
                $
                0.07
                
                $
                0.03Weighted
                    average shares outstanding
                
                
                14,344,584
                
                
                13,928,374
                
                
                13,085,297Cash
                    dividends per common share
                
                $
                0.32
                
                $
                0.32
                
                $
                0.16
 See
          accompanying notes to consolidated financial statements.
   F-3
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Consolidated
          Statements of Shareholders'
          Equity**
 **For
          the years ended November 30, 2005, 2004 and 2003** 
 **Accumulated****Common**
                    
                    **Additional**
                    
                    
                    
                    
                    
                    
                    
                    **Other**
                    
                    **Total****Common
                        Stock**
                    
                    **Stock**
                    
                    **Paid-in**
                    
                    **Retained**
                    
                    **Treasury
                        Stock**
                    
                    **Comprehensive**
                    
                    **Shareholders'****Shares**
                    
                    **Amounts**
                    
                    **Issuable**
                    
                    **Capital**
                    
                    **Earnings**
                    
                    **Shares**
                    
                    **Amount**
                    
                    **Income(loss)**
                    
                    **Equity****Balance,
                        November 30, 2002**
                    
                    
                    14,216,729
                    
                    $
                    14,215
                    
                    
                    485,758
                    
                    $
                    41,692,066
                    
                    $
                    5,948,160
                    
                    
                    1,509,428
                    
                    $
                    (4,387,247
                    )
                    $
                    33,056
                    
                    $
                    43,786,008Net
                        income for the year
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    420,900
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    420,900Unrealized
                        gains on available-for-sale securities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    338,319
                    
                    
                    338,319Foreign
                        Currency Translation adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    476,311
                    
                    
                    476,311Dividends
                        declared
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,049,704
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,049,704
                    )Stock
                        option exercises
                    
                    
                    159,704
                    
                    
                    161
                    
                    
                    
                    
                    
                    343,379
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    343,540Tax
                        benefit from exercise ofstock
                        options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    87,230
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    87,230Common
                        stock issued in connectionwith
                        an acquisition
                    
                    
                    39,174
                    
                    
                    39
                    
                    
                    (242,879
                    )
                    
                    242,840
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    —Purchase
                        of common stock, held in treasury, at cost
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    23,187
                    
                    
                    (63,691
                    )
                    
                    
                    
                    
                    (63,691
                    )Retirement
                        of treasury stock
                    
                    
                    (1,532,615
                    )
                    
                    (1,533
                    )
                    
                    
                    
                    
                    (4,449,405
                    )
                    
                    
                    
                    
                    (1,532,615
                    )
                    
                    4,450,938
                    
                    
                    
                    
                    
                    —**Balance,
                        November 30, 2003**
                    
                    
                    12,882,992
                    
                    
                    12,882
                    
                    
                    242,879
                    
                    
                    37,916,110
                    
                    
                    4,319,356
                    
                    
                    —
                    
                    
                    —
                    
                    
                    847,686
                    
                    
                    43,338,913Net
                        income for the year
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,014,214
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,014,214Unrealized
                        gains on available-for-sale securities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    59,143
                    
                    
                    59,143Foreign
                        Currency Translation adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    240,167
                    
                    
                    240,167Dividends
                        declared
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,281,293
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,281,293
                    )Stock
                        option exercises
                    
                    
                    411,640
                    
                    
                    412
                    
                    
                    
                    
                    
                    1,737,129
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,737,541Tax
                        benefit from exercise ofstock
                        options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    328,297
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    328,297Common
                        stock issued in connectionwith
                        acquisitions
                    
                    
                    215,973
                    
                    
                    216
                    
                    
                    (242,879
                    )
                    
                    1,328,116
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,085,453**Balance,
                        November 30, 2004**
                    
                    
                    13,510,605
                    
                    
                    13,510
                    
                    
                    —
                    
                    
                    41,309,652
                    
                    
                    1,052,277
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,146,996
                    
                    
                    43,522,435Net
                        income for the year
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,428,157
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,428,157Unrealized
                        gains on available-for-sale securities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    65,616
                    
                    
                    65,616Reclassification
                        adjustment for gains realized innet
                        income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (360,584
                    )
                    
                    (360,584
                    )Foreign
                        Currency Translation adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    25,274
                    
                    
                    25,274Dividends
                        declared
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (989,719
                    )
                    
                    (3,480,434
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,470,183
                    )Stock
                        option exercises
                    
                    
                    584,060
                    
                    
                    584
                    
                    
                    
                    
                    
                    2,057,826
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,058,410Tax
                        benefit from exercise ofstock
                        options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    524,334
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    524,334Common
                        stock issued in connectionwith
                        acquisition
                    
                    
                    113,821
                    
                    
                    114
                    
                    
                    
                    
                    
                    682,166
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    682,280**Balance,
                        November 30, 2005**
                    
                    
                    14,208,486
                    
                    $
                    14,208
                    
                    $
                    —
                    
                    $
                    43,584,229
                    
                    $
                    —
                    
                    
                    —
                    
                    $
                    —
                    
                    $
                    877,302
                    
                    $
                    44,475,739
 See
            accompanying notes to consolidated financial
            statements.
 F-4
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 
 ***Traffix,
        Inc. and Subsidiaries***
 **Consolidated
        Statements of Cash Flows**
 **For
        the years ended November 30, 2005, 2004 and 2003**
 **2005**
                
                **2004**
                
                **2003**Cash
                    flows from operating activities:Net
                    income
                
                $
                2,428,157
                
                $
                1,014,214
                
                $
                420,900Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities:Depreciation
                    and amortization
                
                
                2,200,678
                
                
                1,400,995
                
                
                1,436,582Reserve
                    for customer chargebacks
                
                
                (358,809
                )
                
                (28,817
                )
                
                406,352Provision
                    for uncollectible accounts
                
                
                (403,186
                )
                
                406,699
                
                
                576,350Deferred
                    income taxes
                
                
                (210,810
                )
                
                (51,257
                )
                
                124,981Net
                    gains on sale of marketable securities
                
                
                (561,359
                )
                
                (25,490
                )
                
                (19,730
                )Gain
                    on sale of subsidiary
                
                
                (195,000
                )
                
                (784,900
                )
                
                (1,375,801
                )Minority
                    interest
                
                
                494,533
                
                
                —
                
                
                (307,017
                )Changes
                    in assets and liabilities netof
                    acquisitions:Accounts
                    receivable
                
                
                (5,706,420
                )
                
                (42,851
                )
                
                396,921Prepaid
                    expenses and other current assets
                
                
                (155,552
                )
                
                163,224
                
                
                72,782Accounts
                    payable
                
                
                1,753,008
                
                
                324,321
                
                
                139,987Income
                    taxes payable
                
                
                1,227,881
                
                
                300,930
                
                
                1,616,742Due
                    to related parties
                
                
                (201,265
                )
                
                (39,994
                )
                
                55,576Accrued
                    expenses and other liabilities
                
                
                687,359
                
                
                212,070
                
                
                (1,482,677
                )**Net
                    cash provided by operating activities**
                
                
                999,215
                
                
                2,849,144
                
                
                2,061,948Cash
                    flows from investing activities:Purchases
                    of securities
                
                
                (225,749,291
                )
                
                (300,807,389
                )
                
                (309,681,692
                )Proceeds
                    from sales of securities
                
                
                232,537,892
                
                
                301,137,877
                
                
                296,016,630Proceeds
                    from sale of a subsidiary
                
                
                195,000
                
                
                784,900
                
                
                1,375,801Capital
                    expenditures
                
                
                (413,496
                )
                
                (141,052
                )
                
                (1,534,214
                )Cash
                    payment for intangible asset
                
                
                (52,915
                )
                
                (161,499
                )Payments
                    for asset acquisitions, net of cash received
                
                
                (3,077,714
                )
                
                (3,497,653
                )
                
                —**Net
                    cash provided by (used in) investing activities**
                
                
                3,439,476
                
                
                (2,684,816
                )
                
                (13,823,475
                )Cash
                    flows from financing activities:Dividends
                    paid
                
                
                (4,470,183
                )
                
                (4,281,293
                )
                
                (2,049,704
                )Distribution
                    to minority interest holder
                
                
                (128,896
                )
                
                —
                
                
                —Purchases
                    of common stock
                
                
                —
                
                
                —
                
                
                (63,691
                )Repayment
                    of capital lease obligation
                
                
                (105,583
                )
                
                —
                
                
                —Proceeds
                    from stock options exercised
                
                
                2,058,410
                
                
                1,737,541
                
                
                343,540**Net
                    cash used in financing activities**
                
                
                (2,646,252
                )
                
                (2,543,752
                )
                
                (1,769,855
                )Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                (10,001
                )
                
                (6,948
                )
                
                334,698Net
                    increase (decrease) in cash and cash equivalents
                
                
                1,782,438
                
                
                (2,386,372
                )
                
                (13,196,684
                )Cash
                    and cash equivalents, beginning of year
                
                
                7,553,285
                
                
                9,939,657
                
                
                23,136,341**Cash
                    and cash equivalents, end of year**
                
                $
                9,335,723
                
                $
                7,553,285
                
                $
                9,939,657See
                    Notes 1 for a summary of noncash investing activities.
 The
          accompanying notes are an integral part of these financial
          statements.
   F-5
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  ***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**
 **1.**
                  **Significant
                      Accounting
                      Policies**
  **Nature
        of Business**
 
 Traffix,
        Inc. and its consolidated subsidiaries (collectively, “Traffix” or the
“Company”) provide consumer targeted direct marketing and customer acquisition
        services for businesses. The Company utilizes its proprietary and affiliate
        on-line databases to generate its revenue from direct marketing activities
        delivered by the Internet. The Company’s on-line databases grow through on-line
        marketing and data acquisition programs. The Company’s direct marketing
        activities have historically been divided into three principle operating
        segments: a) E-commerce, b) LEC Billed Products and Services, and c) Off-line
        Marketing Services (terminated in fiscal 2003).
  The
        Company’s main focus and business strategy is to create compelling content and
        provide marketing vehicles that generate revenue for its corporate advertisers
        and marketing affiliates who seek access to the Company’s databases, and the
        databases of its affiliates under management.
  Our
        expansion in, and dependence on, our on-line  direct
        marketing efforts, coupled with the potential for state and/or federal
        legislation limiting on-line marketers’ consumer contact capability and the
        potential for seasonality within the E-commerce marketplace, should all be
        considered when referring to our current fiscal year results, as well as
        prior
        year historical results, in evaluating the potential for our future operations,
        cash flows, and financial position.
  **Basis
        of Presentation and Principles of Consolidation**
  It
        is the
        Company’s policy to prepare its financial statements on the accrual basis of
        accounting in conformity with accounting principles generally accepted in
        the
        United States of America.
  The
        consolidated financial statements of the Company include the accounts of
        its
        wholly-owned and majority-owned subsidiaries. Any losses allocated to minority
        interests are limited to the amount of minority interest invested capital.
        All
        significant intercompany accounts and transactions have been eliminated in
        consolidation. Certain amounts for prior periods have been reclassified to
        conform to current year presentations.
  **Estimates**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires the Company's
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements, and the reported amounts of revenue
        and
        expenses during the reporting period. Actual results could differ from those
        estimates. The Company's most significant estimates relate to reserves for
        uncollectible receivables, reserves for data qualification allowances,
        recoverability of long-lived assets, and the realizability of deferred tax
        assets. In the determination of our worldwide provision for income taxes
        and the
        recording of the related deferred tax assets and liabilities, and currently
        payable tax liabilities, we are required to use significant and material
        levels
        of judgment that involve many transactions and calculations. As such, the
        ultimate determination of our tax is uncertain, and we provide for tax
        contingencies in accordance with SFAS No. 5, Accounting for Contingencies.
        As a
        result of the application of SFAS No. 5, we at times establish reserves for
        the
        potential of additional income tax based on our best estimate of the potential
        for the probable loss of certain tax positions taken on our tax returns.
        We
        believe that our combined tax accruals and tax reserves are adequate for
        all tax
        years open to audit. All tax accruals and tax reserves are treated as current
        liabilities in their balance sheet presentation.
  F-6
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 Additionally,
        the Company has potential exposure resulting from pending and/or threatened
        litigation for which the Company currently assesses no risk. No provision
        for
        losses has been recorded for asserted or unasserted claims. Actual results
        could
        differ from our estimates.
  **Revenue
        Recognition, Variable Costs, Allowances and Bad Debts**
  *Revenue*
  We
        currently earn a material portion of our revenue from the E-commerce segment.
        This revenue primarily results from marketing agreements with our marketing
        partners, corporate customers and agreements with customers within our direct
        to
        consumer business. These agreements satisfy the “existence of pervasive evidence
        of an arrangement” required under the current revenue recognition rules under
        Staff Accounting Bulletin (SAB) 101 as modified by SAB 104. The provisions
        of
        each agreement determines the (a) pricing characteristics of the revenue
        generating activity, the specific type of revenue activity (i.e., on-line
        dating
        membership, website advertising activity, email marketing promotion and terms
        of
        LEC recurring billed products), and (b) the method of our delivery obligations
        to, and acceptance obligations of our clients and customers, with (a) and
        (b)
        satisfying the criterion of SAB 101, that “sales price is fixed or determinable”
and “delivery has occurred”. As a function of our client and customer acceptance
        process, we review bank and credit references, business financial statements,
        personal financial statements and/or obtain corporate officer guarantees
        (if
        appropriate), all of which satisfy the SAB 101 criteria, “collectibility is
        reasonably assured”. Based on the revenue recognition criterion discussed above
        the Company believes it recognizes revenue when it is realizable and
        earned.
  *Deferred
        Revenue*
  The
        Company’s on-line dating service is a membership based arrangement, with
        membership offerings ranging from one month subscriptions to plans with annual
        terms. The one-month membership plans form the bulk of our subscription sales.
        Deferred revenue is recorded net of estimated cancellations and is amortized
        over the life of the membership as it is earned. **
  *Contra
        revenue*
  At
        the
        time revenue is recognized, the Company provides for an estimate for
        contractually specified data qualification allowances, when required under
        the
        governing marketing agreement. Such data qualification allowances may include
        allowances for data duplications, invalid addresses, age and country of origin
        restrictions, and are recorded in a contra-revenue account. Our revenues
        are
        adjusted in later fiscal periods if actual allowances vary from amounts
        previously estimated. Historically, variances between actual allowances and
        previously estimated allowances have been immaterial. If events were to occur
        that would cause actual data qualification allowances to vary significantly
        from
        those originally estimated and reflected in the financial statements, we
        could
        suffer material deterioration in future fiscal period gross margins, and,
        therefore, our profitability, cash flows and capital resources could be
        adversely affected.
  F-7
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 *Cost
        of Sales*
  Certain
        revenue related obligations are recorded at the time revenue is recognized.
        They
        include costs payable to other on-line, as well as off-line, media companies
        for
        generating registered users and consumer data for us, database fee sharing
        costs
        under third-party database use agreements, email message delivery costs,
        contingent-based prize indemnification coverage (i.e., sweepstakes payout
        indemnification), estimated premium fulfillment costs related to the respective
        promotion (if applicable) and all other variable costs directly associated
        with
        completing our obligations relative to the revenue being recognized, all
        of
        which satisfy the SAB 101 criteria regarding the concept of “other than a
        perfunctory, or inconsequential ongoing obligation”.
  *Bad
        Debt Allowances*
  Revenue
        recognition is also subject to provisions based on the probability of collection
        of the related trade accounts receivable. We continuously evaluate the potential
        of the collectibility of trade accounts receivable by reviewing such factors
        as
        deterioration in the operating results, financial condition, or bankruptcy
        filings of our customers. As a result of this review process, we record bad
        debt
        provisions to adjust the related receivable carrying amount to an estimated
        realizable value. Provisions for bad debts are also recorded due to the review
        of other factors; including the length of time the accounts receivable are
        past
        due, historical experience and other factors obtained during the conduct
        of
        collection efforts. If circumstances change regarding our specific customers
        on
        an individual basis, or if demand for Internet direct marketing softens,
        or if
        the U.S. economy stumbles, our estimates for bad debt provisions could be
        further increased, which could adversely affect our operating margins,
        profitability, cash flows and capital resources.
  **Research
        and Development**
  The
        Company charges all research and development costs to general and administrative
        expense as incurred.
 
 **Internal
        Use Software**
  The
        Company accounts for the costs of internal use software in accordance with
        Statement of Position 98-01, *Accounting
        for the Costs of Computer Software Developed or Obtained for Internal
        Use* .
        Accordingly, costs other than reengineering costs are expensed or capitalized
        depending on whether they are incurred in the preliminary project stage,
        application development stage or the post-implementation/operation stage.
        As of
        November 30, 2005 and 2004, the Company had $59,000 and $95,000 respectively,
        in
        unamortized capitalized internal use software costs. Amortization of these
        costs
        was $38,000, $40,000 and $38,000 during fiscal year’s ended November 30, 2005,
        2004 and 2003, respectively.
 
 **Earnings
        per Common Share**
  Basic
        earnings per common share is based on the weighted-average number of common
        shares outstanding during each reporting period and excludes the dilutive
        effect
        of stock options. Diluted earnings per common share calculations reflect
        the
        assumed exercise of stock options that have an exercise price that is less
        than
        the average market price of the common shares during each reporting period,
        in
        accordance with the treasury stock method. Dilutive stock options are excluded
        if their effect is antdilutive.
  F-8
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **Concentration
        of credit risk**
 
 Financial
        instruments that potentially subject the Company to concentration of credit
        risk
        have historically consisted of cash and cash equivalents, marketable securities
        and accounts receivable. Currently, the Company invests the majority of its
        excess cash in high-grade commercial paper, with maturities ranging from
        one
        month to three years. Consistent with the above, the Company
        maintains established guidelines requiring diversification of investments
        yielding safety and liquidity.
  Cash
        and
        cash equivalent balances are principally held at six financial institutions
        and
        may, at times, exceed insurable amounts. The Company believes it mitigates
        its
        risks by investing in or through major financial institutions. Recoverability
        is
        dependent upon the performance of the institutions.
  **Cash
        and cash equivalents**
  All
        short-term investments with an original maturity of less than one month are
        considered to be cash equivalents.
  **Marketable
        securities**
  The
        Company’s marketable securities have historically consisted of corporate
        commercial paper, auction rate securities and equity securities, all of which
        are held for varying and indefinite periods of time, pursuant to maturity
        dates,
        market conditions and other factors. It is the Company’s intent to maintain a
        liquid portfolio to take advantage of investment opportunities. Therefore,
        all
        marketable securities are considered to be available-for-sale and except
        for
        annuities, are classified as current assets. Beginning in the fourth
        quarter of fiscal 2005 the Company expects to hold the annuities beyond one
        year. Accordingly, such securities are stated at fair value, with
        unrealized gains and losses, net of the estimated tax effects when applicable,
        being included in other comprehensive income (loss) as a separate component
        of
        shareholders’ equity, until realized. Actual sales of securities resulting in
        realized gains and losses on marketable securities are included in the statement
        of operations, as a component of “Other income (expense)” and are derived using
        the specific identification method for determining the cost of
        securities.
  **Foreign
        Currency Translations**
  The
        Company’s foreign subsidiary uses its local currency as its functional currency.
        The related assets and liabilities are translated at exchange rates in effect
        at
        the balance sheet date, with the resulting translation adjustments being
        recorded directly to other comprehensive income (loss), as a separate component
        of shareholders’ equity; and income and expenses are translated using average
        exchange rates for the periods presented.
  **Transactions
        With Major Customers**
  Historically,
        the significant portion of the Company’s revenue was dependent on a limited
        number of major customers. For the years ended November 30, 2005 and 2004,
        one
        customer made up 11.3%, or $7.1 million, and 11.1%, or $4.1 million,
        respectively, of consolidated revenues. During the year ended November 30,
        2003,
        no individual customer relationship equaled, or exceeded the 10% revenue
        threshold for major customers.
  F-9
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **Property
        and equipment**
  Property
        and equipment are stated at cost and are depreciated using the straight-line
        method over a three to five year useful life depending on the nature of the
        asset. Leasehold improvements are amortized over the life of the improvement
        or
        the term of the lease, whichever is shorter. Expenditures for maintenance
        and
        repairs are expensed as incurred while renewals and improvements are
        capitalized.
  Upon
        retirement or disposal, the asset cost and related accumulated depreciation
        and
        amortization are eliminated from the respective accounts and the resulting
        gain
        or loss, if any, is included in the results of operations for the
        period.
  **Goodwill
        and other purchased intangible assets**
  Statement
        of Financial Accounting Standards No. 142, *Goodwill
        and Other Intangible Assets* (SFAS
        142), adopted by the Company in Fiscal 2003, requires goodwill to be tested
        for
        impairment on an annual basis, and more frequently as events and certain
        circumstances warrant. Under SFAS 142, the Company is required to perform
        a
        two-step process in its impairment assessment. Step one is to test for the
        potential of goodwill impairment. If the potential for impairment is identified
        by step one, then step two is undertaken to measure the amount of impairment
        loss. The Company completed step one in the third quarter of the fiscal year
        ended November 30, 2005, and determined there was no impairment to goodwill,
        nullifying the need for step-two performance.
  During
        the fiscal year ended November 30, 2003, the Company had elected to make
        August
        31 the annual impairment assessment date for all of its reporting units,
        and
        will perform more frequent impairment tests if events or circumstances appear
        to
        indicate that a reporting unit’s fair market value has fallen below its carrying
        amount. The Company estimates the fair value of its reporting units using
        internal analysis, external economic and financial data, external market
        valuations, all of which incorporate valuation applications derived from
        revenue
        multiples, capitalized earnings and discounted cash flow models, and other
        comparable market valuation methods deemed relevant.
  Additional
        purchased intangible assets, other than goodwill, continue to be carried
        at cost
        less accumulated amortization. Amortization is computed over the intangible’s estimated
        periods benefited, primarily three to five years, using straight-line
        amortization. See Note 4, “Goodwill and Identifiable intangible assets”.
  F-10
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **Impairment
        of other long-lived assets**
  Long-lived
        assets and purchased intangible assets are reviewed for impairment if, or
        when,
        events or changes in circumstances indicate that their carrying amounts may
        not
        be recoverable. Determination of long-lived asset recoverability is based
        on
        estimated future cash flows expected to result from the use of such asset
        over
        its remaining useful life and the potential cash flows realizable from its
        possible disposition. If the sum of the expected future cash flows (undiscounted
        and without interest charges) is less than the carrying amount of the long-lived
        asset, an impairment loss is measured as a difference between carrying amount
        and the future discounted cash flows. See Notes 4 and 5.
  **Income
        taxes**
  Deferred
        tax assets and liabilities are based on the expected future tax consequences
        of
        events that have been included in the financial statements or tax returns.
        Deferred tax assets and liabilities are determined based on the difference
        between the financial statement and tax basis of assets and liabilities using
        enacted tax rates in effect for the year in which the differences are expected
        to reverse. Management provides for valuation allowances against deferred
        tax
        assets, when events indicate that the deferred tax assets are more likely
        than
        not to be realized (see Note 9).
  **Dividends**
  During
        the year ended November 30, 2005, we paid dividends in excess of our retained
        earnings, and accordingly the excess of $1.2 million represents a return
        of
        capital, and has been reflected as a reduction to our paid in capital in
        excess
        of par on our Consolidated Statements of Shareholders’ Equity.
  **Advertising
        and marketing expenses**
  The
        Company’s advertising and marketing costs, incurred in the advertising and
        marketing of the Company’s and its clients’ products, services and promotional
        offers, have historically been comprised of (1) costs associated with the
        transmission of email marketing messages, both from internal sources and
        external third party vendors , (2)
        costs
        associated with the purchase of on-line consumer data (including registered
        users to the Company’s websites), and (3) email and website program promotional
        and creative development costs. During the period July 1, 2004 to November
        30,
        2005, pursuant to the acquisition of SendTraffic.com,Inc., the Company included
        the costs of its search engine marketing activities in its advertising and
        marketing cost accounts. Furthermore, (4) during the period January 22, 2005
        to
        November 30, 2005, pursuant to the acquisition of Hot Rocket Marketing, Inc.,
        the Company included the costs of its direct purchases of on-line advertising
        space, which is resold on a performance return basis, and (5) during the
        prior fiscal periods, the Company incurred immaterial search engine marketing
        costs, and no costs of direct purchases of on-line advertising space. All
        above
        referenced costs are charged to operations (1) at the time of the email
        transmission, (2) upon receipt of the qualified consumer data, (3) at the
        time
        the promotional and creative services are provided, (4) at the time the search
        engine marketing media purchases are incurred, and/or (5) at the time the
        on-line advertising space is purchased, respectively, and are included as
        a
        component of cost of sales.
  F-11
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 Total
        advertising and marketing expenses included in cost of sales by segment for
        fiscal 2005, 2004 and 2003 were as follows:
 **Consolidated
                    Advertising and Marketing Costs****Year
                    ended November 30,****2005**
                
                **2004**
                
                **2003**E-commerce
                
                $
                40,265,160
                
                $
                19,460,067
                
                $
                11,327,208Off-line
                    Marketing Services
                
                
                —
                
                
                —
                
                
                261,786**Consolidated
                    totals**
                
                $
                40,265,160
                
                $
                19,460,067
                
                $
                11,588,994
  **Comprehensive
        Income (Loss)**
  The
        Company presents foreign currency translation adjustments and unrealized
        gains
        and losses on its marketable securities (net of tax, when applicable) as
        a
        component of “comprehensive income (loss)” and are presented below:
  **For
                  the Year Ended November 30,****2005**
              
              **2004**
              
              **2003**Net
                  income
              
              $
              2,428,157
              
              $
              1,014,214
              
              $
              420,900Other
                  comprehensive income (loss) , net of tax:Foreign
                  currency translation adjustment
              
              
              25,274
              
              
              240,167
              
              
              476,311Unrealized
                  gain (loss) from available-for-salesecurities,
                  net of income taxes of, $66,512 for 2005,$224,684
                  for 2004 and $-0- for 2003
              
              
              65,616
              
              
              59,143
              
              
              338,319Add:
                  reclassification adjustment for gains realizedin
                  net income, net of tax effect of $224,684
              
              
              (360,584
              )
              
              —
              
              
              —Comprehensive
                  income
              
              $
              2,158,463
              
              $
              1,313,524
              
              $
              1,235,530
   F-12
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **Proforma
        Stock-Based Compensation**
  Pursuant
        to Statement of Financial Accounting Standard ("SFAS") No. 123, *Accounting
        for Stock-Based Compensation* ,
        as
        amended by SFAS No. 148, the Company will continue to use the intrinsic value
        method of accounting for its employee and director stock-based compensation
        awards until its adoption of SFAS 123R, issued in December 2004, with such
        adoption taking place in the Company’s first quarter of Fiscal 2006.
        Accordingly, the Company has not recognized compensation expense for its
        noncompensatory employee and director stock option awards. As recommended
        by
        SFAS No. 123, the fair values of options were estimated using the Black-Scholes
        option-pricing model. Option vesting periods have historically been three
        years,
        except for grants to non-employee members of the Board of directors, which
        fully
        vest at the time of grant. Additionally, options have been granted to management
        that vest upon the attainment of specified financial performance hurdles.
        The
        Company’s adjusted net income and adjusted earnings per share had it elected to
        adopt the fair value approach of SFAS No. 123 in the fiscal year ended November
        30, 1995, which charges earnings for the estimated difference between the
        strike
        price and the fair value of the stock options, would have been as
        follows:
  **Three
                    Years
                    Ended****November
                  30,****2005**
              
              **2004**
              
              **2003**Net
                  income, as reported
              
              $
              2,428,157
              
              $
              1,014,214
              
              $
              420,900Add:
                  Total stock-based compensation expense incurred as reported in
                  net income,
                  net of related tax effects
              
              
              —
              
              
              —
              
              
              —Less:
                  Total stock-based compensation expense determined under fair value
                  based
                  method, net of related tax effects
              
              
              (682,013
              )
              
              (651,982
              )
              
              (889,759
              )Pro
                  forma net income (loss), as adjusted
              
              $
              1,764,144
              
              $
              362,232
              
              $
              (468,859
              )Basic
                  net income(loss) per share:As
                  reported
              
              $
              0.17
              
              $
              0.08
              
              $
              0.03Pro
                  forma
              
              $
              0.12
              
              $
              0.03
              
              $
              (0.04
              )Diluted
                  net income(loss) per share:As
                  reported
              
              $
              0.17
              
              $
              0.07
              
              $
              0.03Pro
                  forma
              
              $
              0.12
              
              $
              0.03
              
              $
              (0.04
              )
 
 The
        pro
        forma amounts shown above, regarding stock-based compensation, are not
        necessarily representative of the impact on net income in future fiscal periods
        subsequent to the first quarter of Fiscal 2006 adoption of SFAS
        123R.
 
 **Segment
        Information**
  Segments
        are defined as components of an enterprise for which separate financial
        information is available that is evaluated regularly by the chief operating
        decision maker(s) in deciding how to allocate resources and in assessing
        performance. Disclosure is also required about products and services, geographic
        areas and major customers. The Company’s three principle operating segments are:
        a) E-commerce, b) Off-line Marketing Services, and c) LEC Billed Products
        and
        Services, with the related segment disclosure information presented in Note
        14.
  F-13
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **Recent
        Accounting Pronouncements**
  In
        November 2005, the FASB issued Staff Position (“FSP”) FAS 115-1/124-1, *The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments* ,
        which
        addresses the determination as to when an investment is considered impaired,
        whether that impairment is other than temporary, and the measurement of an
        impairment loss. This FSP also includes accounting considerations
        subsequent to the recognition of an other-than-temporary impairment and requires
        certain disclosures about unrealized losses that have not been recognized
        as
        other-than-temporary impairments. The guidance in this FSP amends FASB
        Statements No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities* ,
        and
        No. 124, *Accounting
        for Certain Investments Held by Not-for-Profit Organizations* ,
        and APB
        Opinion No. 18, *The
        Equity Method of Accounting for Investments in Common Stock* . This
        FSP is effective for reporting periods beginning after December 15,
        2005. We do not believe the adoption of this FSP will have a material
        impact on our financial statements.
  In
        November 2005, the FASB issued FSP FAS 123(R)-3, *Transition
        Election to Accounting for the Tax Effects of Share-Based Payment Awards.* This
        FSP
        requires an entity to follow either the transition guidance for the
        additional-paid-in-capital pool as prescribed in SFAS No. 123(R), *Share-Based
        Payment* ,
        or the
        alternative transition method as described in the FSP. An entity that adopts
        SFAS No. 123(R) using the modified prospective application may make a
        one-time election to adopt the transition method described in this FSP. An
        entity may take up to one year from the later of its initial adoption of
        SFAS
        No. 123(R) or the effective date of this FSP to evaluate its available
        transition alternatives and make its one-time election. This FSP became
        effective in November 2005. We continue to evaluate the impact that the adoption
        of this FSP could have on our financial statements, See adoption considerations
        for SFAS 123(R), below.
  In
        May
        2005, the FASB issued SFAS No. 154, *Accounting
        Changes and Error Corrections* ,
        a
        replacement of APB Opinion No. 20, *Accounting
        Changes* and FASB
        Statement No. 3. APB Opinion No. 20 had required that changes in accounting
        principles be recognized by including the cumulative effect of the change
        in the
        period in which the new accounting principle was adopted. SFAS No. 154 requires
        retrospective application of the change to prior periods’ financial statements,
        unless it is impracticable to determine the period-specific effects of the
        change. The FASB identified the reason for the issuance of SFAS No. 154 to
        be
        part of a broader attempt to eliminate differences with the International
        Accounting Standards Board (IASB). The Statement is effective for fiscal
        years
        beginning after December 15, 2005. The Company does not believe the adoption
        of
        this statement will have a material impact on our financial
        statements.
  In
        December 2004, the FASB issued SFAS No. 123 (R), *Share
        Based Payment* ,
        which
        replaces SFAS 123, *Accounting
        for Stock-Based Compensation* ,
        and
        supersedes APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        amends SFAS No. 95, *Statement
        of Cash Flows* .
        In
        March of 2005, the SEC issued Staff Accounting Bulletin No. 107, *Share-Based
        Payment* (SAB
        107), regarding its interpretation of SFAS 123R and provides guidance on
        varying
        valuation methods available in the computation and guidance on the other
        related
        matters. The standard requires all share-based payments to employees, including
        grants of employee stock options, to be recognized in the income statement
        based
        on their grant-date fair values. As such, pro forma disclosure in lieu of
        expensing is no longer an alternative. The new standard is effective in the
        first interim or annual reporting period beginning after June 15, 2005. The
        Company is currently assessing the impact that the Statement may have on
        its
        financial statements, and due to the uncertainty of the level of share-based
        payments to be granted in the future, no estimates of the impact are included
        in
        the notes to the financial statements.
  F-14
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 In
              December 2004, the FASB issued SFAS 153, *Exchanges
              of Nonmonetary Assets* ,
              which
              amends APB Opinion No. 29. The guidance in APB 29, *Accounting
              for Nonmonetary Transactions* ,
              is
              based on the principle that exchanges of nonmonetary assets should
              be measured
              based on the fair value of the assets exchanged. The amendment made
              by SFAS 153
              eliminates the exception for exchanges of similar productive assets
              and replaces
              it with a broader exception for exchanges of nonmonetary assets that
              do not have
              commercial substance. The provisions of the statement are effective
              for
              exchanges taking place in fiscal periods beginning after June 15, 2005.
              The
              Company does not believe the adoption of this Statement will have a
              material
              impact on its financial statements.
 
 **2.**
              **Supplemental
                  Cash Flows, Acquisitions and
                  Disposals**
  **Supplemental
        Cash Flow Disclosures**
 **For
                  the fiscal years ended November 30,****2005**
              
              **2004**
              
              **2003**Supplemental
                  disclosures:Cash
                  paid during the year for:Income
                  taxes paid (refunds received), net
              
              $
              39,141
              
              $
              155,684
              
              $
              (1,931,173
              )
  
 **Non-cash
        Investing and Financing Activities**
 
 Non-cash
        investing and financing activities are excluded from the consolidated statement
        of cash flows. For the three years ended November 30, 2005, 2004 and 2003,
        non-cash investing and financing activities included the following
        items:
  Investing
        Activities:
  Stock
        Issued in connection with Acquisitions (Also see notes 5 and
        11 )
 **For
                  the fiscal years ended November 30,****2005**
              
              **2004**
              
              **2003**Hot
                  Rocket Marketing, Inc. - January 21, 2005
              
              $
              682,280
              
              
              —
              
              
              —Send
                  Traffic, Inc. - June 30, 2004
              
              
              —
              
              $
              1,085,453
              
              
              —
   F-15
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **Fiscal
        2005 Acquisition**
 
 On
        January 21, 2005, the Company, through its wholly-owned subsidiary, Hot Rocket
        Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
        Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
        the business of buying and selling performance based on-line advertising
        space
        for third parties. The Company believes that the Hot Rocket acquisition broadens
        its reach into the Internet direct marketing arena, potentially allowing
        for
        expanded client relationships and various other synergistic possibilities,
        such
        as adding value to the Company’s core operations by the enhancement of its
        current and developing marketing programs.
  The
        purchase price was approximately $3.8 million and was comprised of $3.1 million
        in cash, $0.7 million (or 113,821 shares) of the Company’s common stock and
        transaction fees approximating $0.1 million. The
        Company has received an independent, third-party valuation, which allocates
        the
        reported purchase price as follows: approximately $2.2 million to goodwill
        and
        $1.6 million to identifiable, amortizable intangibles. There were no tangible
        assets acquired.
  Assignment
        of acquistion price to Balance Sheet items:
  Identifiable
                Intangibles
              
              $
              1,581,650Goodwill
              
              
              2,163,652Total
                purchase price
              
              $
              3,745,302
  Goodwill
        is not amortized, but it is reviewed for impairment on an annual basis. The
        identifiable intangibles acquired from Hot Rocket consist of employment
        contracts and internally developed software, which will be amortized on a
        straight-line basis over estimated useful lives of five and three years,
        respectively. It is expected that the entire goodwill value will be deductible
        for tax purposes based on the nature of the asset acquisition. The entire
        amount
        of the identifiable intangibles and goodwill are a component of the Company’s
        E-commerce segment.
  In
        addition to the initial cost of the acquisition, we agreed to pay Hot Rocket
        a
        contingent purchase price of up to $12.5 million if Hot Rocket generates
        an
        aggregate of $27 million in EBITDA (as quantified in the Agreement) over
        the
        four-year period following the closing. The contingent purchase price, if
        any,
        will be accounted for as additional purchase price in accordance with EITF
        95-8, *Accounting
        for Contingent Consideration Paid to the Shareholders of an Enterprise in
        a
        Purchase Business Combination* . At
        November 30, 2005, the Company determined that at the current rate of
        growth recognized by Hot Rocket, it attained its first tier contingent payment
        threshold. The first tier contingent payment commences upon the attainment
        of
        EBITDA of $1.5 million for the period February 1, 2005 to January 31, 2006,
        and
        is capped at $4 million. As of November 30, 2005, the Company is liable for
        a
        contingent payment, based on the subsidiary’s EBITDA exceeding the first tier
        $1.5 million minimum threshold and therefore has been accrued as additional
        purchase price of approximately $184,000 at November 30, 2005. The
        Company will continue to assess its liability under the Hot Rocket contingent
        payment arrangement in each successive quarter, and will record additional
        purchase price through increased goodwill, if and when EBITDA calculations
        require additional liability recognition.
  For
        any
        interim period accrual of additional purchase price arising out of the
        contingent arrangement, the Company presently deems that it will be settled
        in
        cash, but retains the right to settle the final payment with a blend of cash
        and
        stock, with stock not to exceed 50% of the total payment and to make as much
        of
        such payment in cash as is necessary to keep all share issuances to Hot Rocket
        at a maximum of 19.9% of the Company’s outstanding stock.
  **Hot
        Rocket Pro Forma
        Information**
  The
        Hot Rocket acquisition closed on January 21, 2005
        and, as such the results of its operations are included in the Company’s consolidated
        results from that date through November 30, 2005. The pro forma disclosure
        set
        forth below provides the details as though the business combination had been
        completed as of December 1, 2004. The pro forma adjustments serve to: (1)
        eliminate intercompany transactions during the pre-acquisition period; (2)
        record amortization expense for the pre-acquisition period; (3) provide for
        income tax expense at Traffix’s marginal
        tax
        rate as applicable to the twelve-month period ended November 30, 2005, applied
        to Hot Rockets adjusted pre tax income; and (4) increase the weighted average
        shares outstanding as if the acquisition shares were issued on December 1,
        2004.
  **Pro
                  forma**
                **Traffix**
                **12-01-04**
                **to**
                **11-30-05**Net
                revenue
              
              $
              64,121,473Income
                from operations
              
              
              2,540,367Income
                before provision for income taxes
              
              
              3,731,186Net
                income
              
              
              2,589,600Diluted
                income per share
              
              $
              0.18Diluted
                weighted average shares outstanding
              
              
              14,409,083
  The
        pro forma disclosure set forth below provides the
        details as though the business combination had been completed as of the
        beginning of the twelve month period commencing January 1, 2004. The Hot
        Rocket
        entity had a natural business year which ended December 31. Both the month
        of
        December 2003, and the period January 1, 2004 to December 31, 2004, did not
        include any material, or non-recurring items requiring separate disclosure
        in
        the pro forma information. The pro forma adjustments serve to: (1) eliminate
        intercompany transactions; (2) record amortization expense for the twelve
        months
        ended December 30, 2004; (3) provide for income tax expense at Traffix’ marginal
        tax rate
        as applicable to the twelve-month period ended November 30, 2004, applied
        to Hot
        Rockets adjusted pre tax income; and (4) increase the weighted average shares
        outstanding as if the acquisition shares were issued on December 1,
        2003.
 **Pro
                      forma**
                    **Traffix**
                    **12-01-03**
                    **to**
                    **11-30-04**Net
                    revenue
                  
                  $
                  44,871,218Income
                    from operations
                  
                  
                  1,894,080Income
                    before provision for income taxes
                  
                  
                  3,652,945Net
                    income
                  
                  
                  2,399,373Diluted
                    income per share
                  
                  $
                  0.17Diluted
                    weighted average shares outstanding
                  
                  
                  14,042,195
 F-16
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **Fiscal
        year ended November 30, 2004 Asset Acquisitions**
  During
        the fiscal year ended November 30, 2004, the Company entered into an Asset
        Acquisition Agreement for the acquisition of the assets of SendTraffic.com,
        Inc.
        (“Send
        Traffic”). Send Traffic warranted that certain financial information contained
        in its unaudited June 30, 2004 balance sheet was accurate, and if such financial
        information ultimately proved post-closing to have been inaccurate, Send
        Traffic
        would return to the Company any shortfall. In order to ensure compliance
        with
        such warranty, the Company retained in escrow $250,000 of the purchase price.
        On
        November 24, 2004, the Company signed an Adjustment Agreement with Greg Byrnes
        and Craig Handelman, the principals of Send Traffic (the “ST Stockholders”),
        regarding the final determination of the June 30, 2004 balance sheet. In
        accordance with the Adjustment Agreement’s “Cash Adjustment” clause, the Company
        received $300,000 in cash from the Send Traffic principals, $250,000 of which
        came from the escrow withheld at closing, and an additional $50,000 of which
        was
        received on November 30, 2004. Additionally, under the Adjustment Agreement’s
“Share Adjustment” clause, the Send Traffic principals returned 57,142 shares to
        the Company, which served to reduce the total shares issued in the asset
        acquisition to 176,799 shares, as compared to the original issuance of 233,941
        shares.
  Upon
        the
        consummation of the Send Traffic acquisition, each of the Send Traffic
        Stockholders entered into five-year employment contracts with the Company’s
        wholly-owned subsidiary.  Included in each of those contracts were
        restrictive covenants prohibiting the Send Traffic Stockholders from competing
        with the Company during the term of their employment and for a period of
        time
        thereafter (the “Restrictive Covenants”).
  At
        the
        time of the Send Traffic acquisition, the Company allocated $665,000 (of
        the
        approximately $5.43 million purchase price) to the Restrictive Covenants,
        which
        the Company began amortizing over a five-year period, or through June 30,
        2009.
  On
        April 6, 2005, the employment relationship between the Send Traffic
        Stockholders and the Company terminated.  The Company maintains that the
        Send Traffic Stockholders resigned from their positions voluntarily and without
        good reason under the terms of their respective employment contracts, in
        which
        event the contracts provide that the Restrictive Covenants would continue
        in
        effect until June 30, 2007.  Accordingly, the Company is reducing the
        period over which it is amortizing the remaining unamortized portion of the
        purchase price allocated to the Restrictive Covenants to the period ending
        June 30, 2007.  As a result of shortening the life of the Restrictive
        Covenants, the increased risk of competition and the reduced future revenues
        that may flow therefrom, the remaining carrying value of the Restrictive
        Covenants as of May 31, 2005 (or $539,000) was re-evaluated in accordance
        with
        SFAS No. 144 and deemed to be impaired by approximately $137,000. This
        impairment loss is included in depreciation and amortization expense in the
        “administrative expense” caption of the Company’s income statement for the year
        ended November 30, 2005. The impairment loss is allocated to the Company’s
        E-commerce segment.
  The
        Send
        Traffic Stockholders have contended that their employment contracts were
        either
        terminated without Cause (as that term is defined in their respective employment
        contracts) by the Company, or that they were entitled to terminate the
        agreements as a result of actions taken by the Company with respect to the
        scope
        of their duties and responsibilities.  If it were determined that the Send
        Traffic Stockholders’ employment was terminated by the Company without Cause,
        then, under their employment contracts, each would have been entitled to
        severance of not less than 6 months’ and up to 12 months’ base salary (such
        amount determined by the Company in its discretion) and the Restrictive
        Covenants would have continued during the severance period. The remaining
        unamortized portion of the purchase price allocated to the Restrictive Covenants
        would be amortized over such period, which would have ended no earlier than
        November 6, 2005 and no later than April 6, 2006, as determined by the
        Company, and, in accordance with SFAS 144, the remaining carrying value of
        the
        Restrictive Covenants would be re-evaluated, with the Company taking an
        impairment loss at the time of re-evaluation.  If, however, it were
        determined that the Send Traffic Stockholders were entitled to terminate
        their
        employment agreements with good reason as a result of actions taken by the
        Company, then the Restrictive Covenants would have ended on April 6, 2005,
        the date of termination, and, in accordance with SFAS 144, the remaining
        unamortized portion of the purchase price allocated to the Restrictive Covenants
        would be an expense in the current period.  As the Company believes the
        restrictive covenants remain valid, should it become necessary, the Company
        will
        defend its position vigorously and use whatever means available to enforce
        them.
 F-17
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **Details
                  of Acquisition**
              
              **SendTraffic.com**Fair
                  Value of assets acquired
              
              $
              6,043,206Liabilities
                  assumed
              
              
              (1,240,788
              )Stock
                  issued
              
              
              (1,107,953
              )Cash
                  paid
              
              $
              3,694,465Less:
                  cash acquired
              
              
              (196,812
              )Net
                  cash paid for acquisition
              
              $
              3,497,653
  **Asset
        Dispositions**
  During
        the fiscal year ended November 30, 2003, the Company sold its majority-owned
        subsidiary, Montvale Management LLC (“Montvale”) to Mortgage Industry
        Consultants, LLC (“MIC”) for $1.6 million, plus its investment. Traffix had
        obtained its 51% interest in September of 1999 through an initial investment
        of
        approximately $50,000. Pursuant to the terms of the sale, the Company received
        $1 million in cash at closing on March 7, 2003. Additionally, we received
        a note
        from the Purchaser for $600,000, payable in 24 monthly installments of $25,000.
        As of November 30, 2005, all payments under the note have been received and
        all
        the appropriate releases have been executed. The Company has also received
        approximately $299,000, representing its capital account in such majority-owned
        subsidiary as at November 30, 2002.
  Based
        on
        management’s assessment of Montvale’s future cash flows, after taking into
        consideration Montvale’s increased obligations with respect to the note
        obligations due the Company, the Company had deemed it prudent to defer
        recognition of income on the unpaid portion of the note. During the period,
        March 2003, the month of the Montvale disposition, to the present time, the
        cost
        recovery method was used in the recognition of the related Montvale installment
        income, of which we received the entire amount under the terms of the
        sale.
  The
        Company also entered into a two-year Media Purchase Agreement whereby it
        agreed
        to provide certain media lead generation and related services to the continuing
        owners of Montvale for consideration of $40,000 per month over the term of
        the
        agreement. As of November 30, 2005, all required installments were received
        under the Media Purchase Agreement.
  F-18
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **3.**
                **Related
                    Party Transactions**
  The
        Company incurred approximately $871,000, $695,000 and $733,000, respectively,
        during fiscal 2005, 2004 and 2003, in legal fees to a firm that employs a
        member
        who is also a director of the Company. The fees charged by such firm were
        at
        rates comparable to rates obtainable from other firms for similar
        services.
  **4.**
              **Marketable
                  Securities**
  The
        carrying amount of the Company’s marketable securities is shown in the table
        below:
 **November
                    30,****2005**
                
                **2004****Cost**
                
                **Market
                    Value**
                
                **Cost**
                
                **Market
                    Value**Available-for-sale
                    securities:Equity
                    securities
                
                $
                1,759,066
                
                $
                1,936,022
                
                $
                1,120,303
                
                $
                1,781,139Certificates
                    of deposit
                
                
                400,606
                
                
                397,042
                
                
                2,492,508
                
                
                2,485,702Annuity
                
                
                2,662,905
                
                
                2,662,905
                
                
                2,584,507
                
                
                2,584,507Corporate
                    commercial paper
                
                
                16,575,000
                
                
                16,575,000
                
                
                21,400,000
                
                
                21,400,000Total
                
                $
                21,397,577
                
                $
                21,570,969
                
                $
                27,597,318
                
                $
                28,251,348Classified
                  as:Current
                
                $
                18,734,672
                
                $
                18,908,064
                
                $
                27,597,318
                
                $
                28,251,348Non-current
                
                
                2,662,905
                
                
                2,662,905
                
                
                —
                
                
                —Total
                
                $
                21,397,577
                
                $
                21,570,969
                
                $
                27,597,318
                
                $
                28,251,348
  Marketable
        securities shown in the above table are carried at the stated fair value.
        The
        cost basis of the marketable securities with scheduled maturities within
        one
        year was $18,734,672 and $27,597,318 for fiscal 2005 and fiscal 2004,
        respectively.
  Proceeds,
        realized/unrealized gains and realized/unrealized losses from sales of
        securities classified as available-for-sale for fiscal years ended November
        30,
        consisted of the following:
  **2005**
              
              **2004**
              
              **2003**Proceeds
                  from sales of securities
              
              $
              232,537,892
              
              $
              301,137,877
              
              $
              296,016,630Gross
                  realized gains
              
              
              600,626
              
              
              35,873
              
              
              21,478Gross
                  realized losses
              
              
              (39,267
              )
              
              (10,383
              )
              
              (1,748
              )Net
                  realized gains
              
              
              561,359
              
              
              25,490
              
              
              19,730Comprehensive
                  income gains(losses):Gross
                  unrealized gains
              
              
              331,897
              
              
              200,107
              
              
              411,528Gross
                  unrealized losses
              
              
              (266,281
              )
              
              (140,964
              )
              
              (73,209
              )Total
                  net unrealized gains(losses)
              
              
              65,616
              
              
              59,143
              
              
              338,319
   F-19
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **5.**
              **Goodwill
                  and identifiable intangible
                  assets**
  The
        gross
        carrying value and accumulated amortization of goodwill and other intangibles
        are as follows:
 
 As
                  of November 30, 2005
              
              As
                  of November 30, 2004Gross
              
              
              
              GrossCarrying
              
              Accumulated
              
              Carrying
              
              AccumulatedAmount
              
              Amortization
              
              Amount
              
              AmortizationE-Commerce
                  Segment Amortizable intangible assets:*GroupLotto
                  identifiable intangibles:*GroupLotto
                  Site Brand Recognition
              
              $
              722,922
              
              $
              630,808
              
              $
              722,922
              
              $
              486,225GroupLotto
                  Database
              
              
              433,754
              
              
              378,486
              
              
              433,754
              
              
              291,735Intellectual
                  Property Assets
              
              
              289,169
              
              
              252,323
              
              
              289,169
              
              
              194,490Marketing
                  Right License Fee
              
              
              252,915
              
              
              80,590
              
              
              200,000
              
              
              30,000*Infiknowledge
                  identifiable intangibles:*Internet
                  Game Suite
              
              
              263,241
              
              
              207,717
              
              
              258,109
              
              
              152,328Intellectual
                  Property Assets
              
              
              197,430
              
              
              155,788
              
              
              193,582
              
              
              114,246Market
                  Position Acquired
              
              
              219,367
              
              
              173,098
              
              
              215,091
              
              
              126,940*Thanksmuch
                  identifiable intangibles:*Profiled
                  customer data
              
              
              50,000
              
              
              50,000
              
              
              50,000
              
              
              44,305Restrictive
                  Covenants
              
              
              10,000
              
              
              8,878
              
              
              10,000
              
              
              6,878*SendTraffic
                  identifiable intangibles:*Restrictive
                  Covenants
              
              
              523,109
              
              
              221,609
              
              
              660,592
              
              
              55,049Software
              
              
              963,951
              
              
              420,118
              
              
              963,951
              
              
              123,564*Hot
                  Rocket identifiable intangibles*Restrictive
                  Covenants
              
              
              569,394
              
              
              98,379
              
              
              —
              
              
              —Software
              
              
              1,012,257
              
              
              291,492
              
              
              —
              
              
              —Total
                  E-Commerce Segment amortizable intangible assets
              
              $
              5,507,509
              
              $
              2,969,286
              
              $
              3,997,170
              
              $
              1,625,761Unamortized
                intangible assets;E-Commerce Segment
                  Goodwill
              
              $
              6,426,336
              
              
              
              
              $
              4,231,054
   F-20
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 
 The
          Infiknowledge identifiable intangibles and unamortizable goodwill carrying
          value
          changes as a result of the effects of foreign currency exchange
          translation.
  The
          amortizable intangibles listed above are deemed to have a finite life of
          five
          years, or less, from the date of acquisition, with the weighted average
          life
          being 4.1 years.
  The
          acquisition identifiable intangibles related amortization expense has been
          recorded from the dates of the respective acquisitions.
  The
          future E-Commerce Segment intangible amortization expense for the next
          five
          fiscal years is estimated to be as follows:
 
 **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010***GroupLotto
                  Identifiable intangible amortization:*GroupLotto
                  Site Brand Recognition
              
              $
              92,114
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —GroupLotto
                  Database
              
              
              55,268
              
              
              —
              
              
              —
              
              
              —
              
              
              —Intellectual
                  Property Assets
              
              
              36,846
              
              
              —
              
              
              —
              
              
              —
              
              
              —Licenses
              
              
              63,853
              
              
              52,667
              
              
              45,805
              
              
              10,000
              
              
              -*Total
                  Group's amortization*
              
              
              248,081
              
              
              52,667
              
              
              45,805
              
              
              10,000
              
              
              -*Infiknowledge
                  Identifiable intangible amortization:*Cost
                  allocatedInternet
                  Game Suite
              
              
              52,935
              
              
              1,695
              
              
              498
              
              
              395
              
              
              —Intellectual
                  Property Assets
              
              
              39,702
              
              
              1,271
              
              
              373
              
              
              296
              
              
              —Market
                  Position Acquired
              
              
              44,113
              
              
              1,412
              
              
              415
              
              
              329
              
              
              —*Total
                  Group's amortization*
              
              
              136,750
              
              
              4,378
              
              
              1,286
              
              
              1,020
              
              
              —*ThanksMuch
                  Identifiable intangible amortization:*Restrictive
                  Covenants
              
              
              1,122
              
              
              —
              
              
              —
              
              
              —
              
              
              —*Total
                  Group's amortization*
              
              
              1,122
              
              
              —
              
              
              —
              
              
              —
              
              
              —*SendTraffic
                  identifiable intangible amortization:*Restrictive
                  Covenants
              
              
              201,000
              
              
              100,501
              
              
              —
              
              
              —
              
              
              —Software
              
              
              296,554
              
              
              234,897
              
              
              1,238
              
              
              —
              
              
              —497,554
              
              
              335,398
              
              
              1,238
              
              
              —
              
              
              —*Hot
                  Rocket identifiable intangible amortization*Restrictive
                  Covenants
              
              
              113,879
              
              
              113,879
              
              
              113,879
              
              
              113,879
              
              
              15,500Software
              
              
              337,419
              
              
              337,419
              
              
              45,926
              
              
              —
              
              
              —$
              451,298
              
              $
              451,298
              
              $
              159,805
              
              $
              113,879
              
              $
              15,500**Summary***GroupLotto
                  Identifiable intangibles:*
              
              $
              248,081
              
              $
              52,667
              
              $
              45,805
              
              $
              10,000*Infiknowledge
                  Identifiable intangibles:*
              
              
              136,750
              
              
              4,378
              
              
              1,286
              
              
              1,020*ThanksMuch
                  Identifiable intangibles:*
              
              
              1,122
              
              
              —
              
              
              —
              
              
              —*Hot
                  Rocket Identifiable intangibles:*
              
              
              451,298
              
              
              451,298
              
              
              159,805
              
              
              113,879
              
              
              15,500*SendTraffic
                  identifiable intangibles:*
              
              
              497,554
              
              
              335,398
              
              
              1,238
              
              
              —
              
              
              —*Total
                  identifiable intangible amortization*
              
              $
              1,334,805
              
              $
              843,741
              
              $
              208,134
              
              $
              124,899
              
              $
              15,500
   F-21
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **6.**
              **Property
                  and Equipment**
  Property
        and equipment as of November 30 consist of the following:
 **2005**
                
                **2004**Furniture
                    and fixtures
                
                $
                448,395
                
                $
                400,751Computers
                    and equipment
                
                
                5,110,240
                
                
                4,459,621Land
                    and Building
                
                
                712,566
                
                
                698,677Leasehold
                    improvements
                
                
                242,536
                
                
                238,9466,513,737
                
                
                5,797,995Less:
                    accumulated depreciation and amortization
                
                
                4,196,047
                
                
                3,416,631$
                2,317,690
                
                $
                2,381,364
  Depreciation
        and amortization expense on property, equipment and leasehold improvements
        for
        the years ended November 30, 2005, 2004 and 2003 was approximately $733,000,
        $764,000 and $904,000, respectively.
  **7.**
              **Accrued
                  expenses**
  Accrued
        expenses as of November 30 are comprised of the following at:
 **2005**
              
              **2004**Accrued
                  payroll and bonuses
              
              $
              972,280
              
              $
              530,030Advances
                  from customers
              
              
              623,847
              
              
              645,981Accrued
                  fee share liabilities
              
              
              327,511
              
              
              294,149Capital
                lease obligation, all current
              
              
              237,417
              
              
              —Accrued
                  marketing media costs
              
              
              1,376,053
              
              
              555,728Accrued
                  search engine marketing costs
              
              
              9,411
              
              
              432,967Accrued
                  license fee
              
              
              —
              
              
              45,000Accrued
                  professional fees
              
              
              380,696
              
              
              317,057Accrued
                  LEC Segment service bureau costs
              
              
              85,058
              
              
              138,200Accrued
                  property taxes
              
              
              29,237
              
              
              28,073Accrued
                  straight-line rent concession
              
              
              29,660
              
              
              74,120Other
                  accrued liabilities
              
              
              198,825
              
              
              389,493Total
                  accrued liabilities
              
              $
              4,269,995
              
              $
              3,450,798
  The
          accrued expense category includes a capital lease obligation of $237,417
          at
          November 30, 2005. The entire captial lease obligation is currently payable
          in
          Fiscal 2006. The consolidated statement of cash flows for Fiscal 2005 reflects
          $105,583 as financing activities related to repayments during Fiscal 2005
          under
          the capital lease obligation.
 F-22
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **8.**
              **Other
                  Income (expense)**
  Other
        Income (expense) consisted of the following for the fiscal years ended November
        30:
 **2005**
              
              **2004**
              
              **2003**Other
                  income (expense):Interest
                  income and dividends
              
              $
              957,069
              
              $
              544,153
              
              $
              479,934Realized
                  gains on sale of marketable securities
              
              
              561,359
              
              
              25,490
              
              
              19,730Realized
                  gain on sale of subsidiary
              
              
              195,000
              
              
              784,900
              
              
              1,375,801Other
                  non-operating income:Vendor
                  settlement on prior year marketing fee
              
              
              —
              
              
              350,000
              
              
              —Foreign
                  currency exchange rate fees and interest
              
              
              (21,244
              )
              
              (20,793
              )
              
              —Interest
                  and penalties -tax audits and settlements
              
              
              —
              
              
              (69,581
              )
              
              —Reduction
                  to prior year's LEC reserve
              
              
              —
              
              
              34,181
              
              
              —Other
                  miscellaneous income(expense)
              
              
              (6,832
              )
              
              104,311
              
              
              (54,068
              )Minority
                  interest income
              
              
              (494,533
              )
              
              —
              
              
              (137,567
              )Total
                  Consolidated OtherIncome,
                  net
              
              $
              1,190,819
              
              $
              1,752,661
              
              $
              1,683,830
 
 **Minority
        Interest**
 
 On
        January 12, 2005, we entered into an agreement with Madacy Entertainment,
        through a newly created partnership, EZTracks LP, to market and promote
        EZTracks.com, our new web destination consisting of approximately 30,000
        downloadable songs covering a wide array of musical genres. We, through a
        wholly-owned subsidiary, own 50.7% of the partnership and will be responsible
        for managing the operations of the business, including generating traffic
        to the
        website, as well as selling advertising on the site. Madacy Entertainment,
        through its wholly-owned subsidiary, owns 49.3% of the partnership and will
        provide its inventory of music and an extensive library of music licensed
        from
        other parties. Madacy will have limited involvement with certain aspects
        of
        operations. The results of operations for the year ended November 30, 2005
        include the fully consolidated results of EZTracks LP with minority interest
        established to reflect Madacy’s ownership share of the partnership’s operating
        results for the period January 12, 2005 to November 30, 2005.
  The
        following table summarizes the results of EZ Tracks for the period January
        12,
        2005 to November 30, 2005:
 
 Net
                  Revenues
              
              $
              8,369,797Cost
                  of Sales
              
              
              7,286,976Gross
                  Profit
              
              
              1,082,821General
                  & Administrative Expenses
              
              
              79,712Net
                  Income
              
              
              1,003,109Minority
                  Interest - Income Statement
              
              
              494,533Distributions
                  to Minority Interest
              
              $
              128,896
   F-23
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **9.**
              **Income
                  Taxes**
  The
        provision (benefit) for income taxes consists of the following:
 **2005**
                
                **2004**
                
                **2003**Current
                    tax provision (benefit):U.S
                    federal taxes
                
                $
                1,125,355
                
                $
                243,732
                
                $
                (112,336
                )Foreign
                    taxes
                
                
                (26,088
                )
                
                191,694
                
                
                (32,173
                )U.S.
                    state taxes
                
                
                157,034
                
                
                21,598
                
                
                (130,237
                )1,255,301
                
                
                457,024
                
                
                (274,746
                )Deferred
                    tax provision (benefit):U.S
                    federal taxes
                
                
                (120,766
                )
                
                (40,057
                )
                
                33,425Foreign
                    taxes
                
                
                35,809
                
                
                (20,968
                )
                
                86,226U.S.
                    state taxes
                
                
                (127,707
                )
                
                8,604
                
                
                7,524(212,664
                )
                
                (52,421
                )
                
                127,175**Total
                    provision**
                
                $
                1,042,637
                
                $
                404,603
                
                $
                (147,571
                )
 The
        domestic and foreign components of income before taxes are as
        follows:
  **Year
                  Ended November 30,****2005**
              
              **2004**
              
              **2003**Domestic
              
              $
              2,598,603
              
              $
              993,402
              
              $
              (228,846
              )Foreign
              
              
              872,191
              
              
              425,413
              
              
              502,175**Income
                  before taxes**
              
              $
              3,470,794
              
              $
              1,418,815
              
              $
              273,329
  The
        following is a reconciliation of the income tax expense computed using the
        statutory federal income tax rate to the actual income tax expense and its
        effective income tax rate:
  **Year
                    ended November 30,****2005**
                
                **2004**
                
                **2003**Income
                    tax expense computedat
                    statutory rate
                
                $
                1,180,070
                
                $
                482,398
                
                $
                92,932State
                    income taxes, net of federalincome
                    tax benefit
                
                
                19,356
                
                
                19,933
                
                
                (80,991
                )Foreign
                    tax statutory rate excess overU.S
                    statutory rate
                
                
                10,005
                
                
                46,581
                
                
                35,675Change
                    in valuation allowance
                
                
                (26,628
                )
                
                (500,218
                )
                
                (485,527
                )Increase
                    in tax contingencies
                
                
                (268,271
                )
                
                243,733
                
                
                —Nondeductible
                    items
                
                
                122,298
                
                
                106,223
                
                
                125,103Foreign
                    Tax Credits reclassified to expense
                
                
                —
                
                
                —
                
                
                276,030U.S.
                    federal tax benefit from Foreign TaxCredit
                    reclassification to expense
                
                
                —
                
                
                —
                
                
                (112,336
                )Other
                    differences, net
                
                
                5,807
                
                
                5,953
                
                
                1,543Effective
                    income tax (benefit) expense
                
                $
                1,042,637
                
                $
                404,603
                
                $
                (147,571
                )
   F-24
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 The
        components of net deferred tax assets are as follows:
 **November
                    30,****2005**
                
                **2004**Deferred
                    tax assets:Current:Accrued
                    expenses and reserves not currentlydeductible
                
                $
                899,639
                
                $
                961,687Marketable
                    securities
                
                
                (66,511
                )
                
                (224,684
                )Realized
                    capital losses on marketable securitiesand
                    long term investments
                
                
                68,121
                
                
                324,984Valuation
                    allowance on realized capital losses
                
                
                (1,610
                )
                
                (100,506
                )Foreign
                    Income Tax Credit carryforward
                
                
                536,772
                
                
                176,214Valuation
                    allowance - foreign tax credits
                
                
                (56,534
                )
                
                (46,581
                )Net
                    operating loss carryforwards
                
                
                —
                
                
                114,982**Total
                    current assets**
                
                
                1,379,877
                
                
                1,206,096Non-current:Fixed
                    assets and intangibles
                
                
                478,050
                
                
                234,256State
                    net operating losses
                
                
                3,148,778
                
                
                1,384,849Valuation
                    allowance
                
                
                (3,148,778
                )
                
                (1,322,442
                )**Total
                    noncurrent assets**
                
                
                478,050
                
                
                296,663**Total
                    assets**
                
                
                1,857,927
                
                
                1,502,759Deferred
                    tax liabilities:Fixed
                    assets and intangibles
                
                
                (267,258
                )
                
                (166,827
                )Other
                
                
                (35,207
                )
                
                (149,452
                )**Total
                    noncurrent liabilities**
                
                
                (302,465
                )
                
                (316,279
                )**Net
                    deferred tax assets**
                
                $
                1,555,462
                
                $
                1,186,480
  At
        November 30, 2005 and 2004, valuation allowances of $3,148,778 and $1,322,442,
        respectively, were established, primarily for state tax net operating losses,
        which can not be carried back by statute, and have reduced the deferred tax
        assets to an amount which the Company believes is more likely than not to
        be
        realized.
  During
        the year ended November 30, 2001, a valuation allowance of $1,641,424 was
        established for realized capital losses. During the years ended November
        30,
        2003 and 2002, the Company recognized $485,527 and $43,244, respectively,
        in tax
        savings related to net capital gains, which were not taxed, based on the
        realization of the tax benefit of the prior year’s capital loss valuation
        allowance. At November 30, 2005 and 2004, the capital loss deferred tax assets
        and related valuation allowances were reduced for the respective current
        year’s
        tax benefits realized. The Company did not have specific appreciated capital
        gain property to provide future carryforward value. Therefore a full valuation
        allowance was taken at November 30, 2001 to reduce the related deferred tax
        assets to an amount which the Company believed was more likely than not to
        be
        realized. At
        November 30, 2005, the balance of the deferred tax asset relating to prior
        years
        capital losses amounted to $68,121, with a corresponding valuation allowance
        of
        $1,610. Such capital losses expire on November 30, 2006. The Company has
        appreciated capital assets at November 30, 2005. Further it has both the
        ability
        and the intent to sell these appreciated assets to realize the significant
        portion of this capital loss carryforward of $66,511. Additionally, during
        the
        fourth quarter of Fiscal 2005, the Company settled certain state tax audits
        which yielded an outcome that was approximately $200,000 less than amounts
        recorded relative to the initial exposure assessed. The excess exposure has
        been
        reflected as a reduction (benefit) to the Company’s current state provision in
        the fourth quarter of Fiscal 2005.  The
          Company has approximately $59.6 million of state net operating losses expiring
          through 2015.
  F-25
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
  **10.**
              **Litigation**
  We
        are
        subject to legal proceedings, lawsuits and other claims, brought by:
        (1) consumers of our products and services; (2) our clients;
        (3) consumers of our clients' products and services; and (4) others
        bringing claims that arise in the normal course of our business. Legal
        proceedings are subject to numerous uncertainties rendering the prediction
        of
        their outcome difficult. As a result of such uncertainty, we are unable to
        estimate the ultimate outcome of any of the subsequently mentioned claims,
        and,
        accordingly, no provision for loss has been recorded. We believe that
        individually, and in the aggregate, the ultimate settlement of the subsequently
        mentioned claims should not have a material adverse effect on our consolidated
        financial position, results of operations or cash flows.
  *Qwest*
  Qwest
        Communications, Inc. notified the Company of an indemnification claim
        relating to a class action filed against Qwest in Minnesota, *Bindner
        v. LCI International Telecom Corp. et al.* ,
        District Court of Minnesota, County of Sibley, Case No. C0-00-242 (the
“Class Action”). In that action, plaintiffs claimed that from
        September 1998 to July 1999, they were misled when they were solicited
        to change their long distance carrier to Qwest. They asserted that they were
        not
        told that they would have to stay at certain hotels and pay regular rates
        as
        part of a promotion involving free airline tickets. The Company introduced
        the
        promotion (“Fly Free America”) to Qwest, and was retained by Qwest to operate
        the telemarketing campaign pursuant to an Agreement between Qwest and the
        Company. In or about May 2000, Qwest and the Company entered into an
        agreement terminating the Agreement and settling the amount due the Company
        (the
“May 2000 Agreement”). The Agreement and the May 2000 Agreement
        contained language that Qwest claimed obligated the Company to indemnify
        Qwest
        for the losses it sustained by reason of this class action. The Company
        maintains that it has no liability in the matter.
  Fraud
        claims in the Class Action were dismissed, leaving breach of contract and
        false advertising claims. The court certified the class and Qwest, without
        the
        Company’s consent, agreed to settle the Class Action. The court approved
        the settlement agreement, stated that there was no finding of any liability
        against Qwest, and approved the attorneys’ fees for plaintiffs’ counsel. No
        appeal was taken so that the Class Action has been concluded.
  In
        November 2002, the Company commenced an arbitration against Qwest to
        recover certain amounts held in escrow that were due the Company pursuant
        to the
        May 2000 Agreement. In December 2002, Qwest filed counterclaims in the
        arbitration relating to the Fly Free America program. Qwest asserted that
        in
        connection with the Class Action, the Company must indemnify it for
        $3.4 million in Qwest attorneys’ fees; $600,000 in fees for counsel to the
        plaintiffs in the Class Action; and $500,000 in settlement payments to
        Class members. Qwest also sought reimbursement of approximately
        $3.1 million it paid the Company pursuant to the May 2000 Agreement.
        Initially, Qwest also sought to recover approximately $1.5 million of fines
        and penalties it claimed it paid to various attorneys general; Qwest has
        now
        withdrawn that claim.
  A
        panel
        of arbitrators was appointed in December 2003. The panel established a
        schedule for substantive motions and for hearings in June 2004. The
        arbitrators also provided for exchanges of information in the arbitration
        subject to Qwest’s right to seek to prevent such exchanges. Qwest moved to
        prevent exchanges of information and this application was granted. Qwest
        moved
        for summary judgment with respect to its indemnification counterclaim. That
        motion was denied. Arbitration hearings on liability were held during the
        week
        of June 20, 2005.
  F-26
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 In
        late
        October, 2005, the arbitration panel issued an award dismissing with prejudice
        all of Qwest’s claims against the Company, granting the Company’s claim to
        recover the $600,000 escrow plus any accrued interest. The Award has been
        fully
        implemented.
  *Columbia
        House/Rydel*
  In
        or
        about August 2002, Columbia House, one of the Company’s clients, notified
        it of an indemnification claim relating to a class action filed against Columbia
        House, among others, in Illinois, *Rydel
        v. Comtrad Industries, Inc. et al.* ,
        Circuit
        Court of Cook County, Illinois, No. 02 CH 13269. In that action, plaintiff
        claims to have received unsolicited commercial e-mail from, among others,
        Columbia House, in violation of Illinois law, and asserts two basic claims
        against Columbia House, one for violation of Illinois’ Consumers Fraud Statute,
        the second for violation of Illinois’ Electronic Mail Act. Columbia House
        advised us that it believes that the email in question was not approved by
        Columbia House when it was sent, and asserted a claim for indemnification
        against the Company pursuant to its contract. The Company and Columbia House
        agreed to defer resolution of the indemnification claim (and reserved each
        of
        their respective rights). Columbia House is defending against the class action.
        Its motion to dismiss was granted as to the Consumer Fraud claim, but denied
        as
        to the Electronic Mail Act claim. The plaintiff has appealed the partial
        dismissal.
  In
        or
        about January 2003, the Company was named as a defendant in the *Rydel* class
        action. In an additional count in the complaint, the plaintiff asserted that
        the
        Company violated the Illinois Consumer Fraud and Deceptive Business Practices
        Act by providing to a co-defendant a list of consumers who had consented
        to
        receive commercial e-mails when, the complaint alleges, they had not. The
        complaint sought injunctive relief and unspecified damages. The Company’s motion
        to dismiss the claim as against it was granted in June 2003, and the
        plaintiff filed an appeal.
  In
        late
        2004, the appellate court affirmed the decision below, so that the claim
        against
        the Company is dismissed; the Consumer Fraud claim against Columbia House
        is
        dismissed; and the Electronic Mail Act claim against Columbia House remains.
        The
        plaintiff asked the appellate court to reconsider its decision, and the court
        denied that request on April 14, 2005.
  *Nasco
        Corporate Finance Consultants, LLC., Todd Cook et al* ***.***
  In
        December 2004, the Company filed an action, *Traffix,
        Inc. v. Nasco Corporate Finance Consultants, LLC, Todd Cook et
        al,* Supreme
        Court of the State of New York, County of New York, Index No. 604348/04.
        In the
        action, the Company seeks to recover approximately $600,000, plus interest
        and
        attorneys’ fees, from certain entities and from the principals of such entities,
        for their failure to pay the Company for customer leads which the Company
        sold
        and delivered to them. The claims include breach of contract, fraud, unjust
        enrichment and piercing the corporate veil. Defendants brought a motion to
        dismiss the complaint, which motion was denied in part by the Court and
        otherwise withdrawn by defendants, except with respect to one of the defendants’
principals against whom the case was dismissed without prejudice, for lack
        of
        personal jurisdiction.
  In
        late
        2005, defendants asserted counterclaims against the Company for, *inter
        alia,* breach
        of
        contract, breach of certain alleged implied warranties, quantum meruit, goods
        sold and delivered, account stated and unjust enrichment, and alleged damages
        of
        $8,000,000. The Company believes that there is no merit to the counterclaims
        and
        intends vigorously to defend against them.
  The
        court
        limited discovery and ordered the parties to engage in mediation. A session
        was
        held before the mediator on February 9, 2006, but no settlement was
        reached.
  As
        stated
        above, the Company is unable to determine the ultimate outcomes of any of
        the
        foregoing claims or demands, and, accordingly, no provision for loss has
        been
        recorded.
 
 F-27
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **11.**
              **Commitments
                  and Contingencies**
  **Leases**
  The
        Company is obligated under two noncancelable real property operating lease
        agreements that expire through fiscal 2010. Future minimum rental payments
        consist of the following at November 30, 2005:
 2006
                
                $
                304,0002007
                
                
                92,0002008
                
                
                95,0002009
                
                
                63,0002010
                
                
                47,000$
                601,000
  The
        certain leases contain escalation clauses with respect to real estate taxes
        and
        related operating costs. The accompanying financial statements reflect rent
        expense on a straight-line basis over the term of the lease as required by
        accounting principles generally accepted in the United States of America.
        Rent
        expense for all leases was $409,000, $346,000 and $456,000 for fiscal 2005,
        2004
        and 2003, respectively. On February 2, 2006 the Company modified the term
        of its
        corporate facility lease, extending the term for a five-year period commencing
        on July 1, 2006. Future minimum annual rental payments will approximate $313,000
        during the five-year term of the renewal modification.
  **Employment
        Agreements**
 *Jeffrey
          L. Schwartz*
  The
          employment agreement with Jeffrey L. Schwartz, our Chairman and Chief Executive
          Officer, expired on November 30, 2005. Mr. Schwartz continues to serve
          as our
          Chairman and Chief Executive Officer as an employee-at-will, but is in
          the
          process of negotiating with our Board the terms of a new employment
          agreement.
  F-28
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 *Andrew
          Stollman*
 
 We
          entered into an employment agreement, effective December 1, 2001, with
          Andrew Stollman, which agreement was orally amended on June 3, 2004 (the
“First Amendment”).  On May 10, 2005, the First Amendment was reduced
          to writing and we executed a second amendment to Mr. Stollman’s employment
          agreement (the “Second Amendment”).  The employment agreement, as amended
          by the First Amendment and Second Amendment, now expires on November 30,
          2007 and further provides that Mr. Stollman (i) is employed as our
          President and Secretary; (ii) was paid for the fiscal year ended
          November 30, 2005, and will be paid for all fiscal years remaining under
          the term, $544,500 per annum; (iii) will receive bonuses upon our Company’s
          achievement of certain pre-tax income milestones and (as added by the Second
          Amendment) certain EBITDA (as defined) milestones, as well as discretionary
          bonuses subject to approval of our Board of Directors; (iv) upon the
          commencement of the agreement on December 1, 2001, was issued a ten-year
          option to acquire 105,000 shares of our Common Stock at an exercise price
          of
          $5.70 per share; (v) upon the execution of the First Amendment, was issued
          a ten-year option to acquire 405,000 shares of our Common Stock at an exercise
          price of $7.34 per share, 110,000 shares of which failed to vest and the
          remaining 295,000 shares of which vest as follows:
  (a)
                75,000
                    shares vested immediately;
  (b)
                110,000
                    shares will vest if we have Operating Cash Flow (as defined in
                    the Second
                    Amendment) for Fiscal 2006 equal to or greater than $4.65 million;
                    and
  (c)
                110,000
                    shares will vest if we have Operating Cash Flow for Fiscal 2007
                    equal to
                    or greater than $5.29 million.
 (vi)  agreed
              not to compete or engage in a business competitive with our business
              during the
              term of the agreement and for a period of one year thereafter; (vii) if his
              employment is terminated other than as a result of a “For Cause Event” (as
              defined in the original 2001 employment agreement), will be entitled
              to receive
              additional compensation and other consideration, all as more fully
              described in
              the original 2001 employment agreement; and (viii) if his employment is
              terminated as a result of a “Change in Control” (as defined in the original 2001
              employment agreement), will be entitled to receive a one-time payment
              in an
              amount equal to 2.99 times his “base amount” determined in accordance with the
              applicable provisions of the Internal Revenue Code.
 
 The
              foregoing is only a summary of the material terms of our employment
              agreements
              with the Named Officers. For a complete description, copies of such
              agreements
              are annexed hereto in their entirety as exhibits or are otherwise incorporated
              herein by reference.
 **Acquisition
          related Additional Contingent Purchase Price
          Consideration**
 
 The
        Company is liable under certain acquisition agreements (see Note 2) regarding
        the potential of additional payment of purchase price consideration arising
        out
        of the attainment of post acquisition operating milestones as defined in
        the
        acquisition agreements.
   F-29
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **Continuing
        Obligations under Fixed Asset and Service Agreements**
 
 During
        June 2005, the Company entered into a combined fixed asset acquisition and
        service agreement for the purchase of computer server equipment used in its
        email marketing business and a service agreement related to the maintenance,
        storage and usage of such equipment. Under the terms of the agreement, the
        Company is obligated to pay $63,000 per month, for twelve consecutive months,
        commencing on August 1, 2005.
 
 **12.**
              **Earnings
                  Per Share**
  The
        following table sets forth the reconciliation of the weighted average shares
        used for basic and diluted earnings per share:
  **Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003**Denominator:Denominator
                  for basic earnings pershare
                    - weighted average shares
                
                
                13,973,899
                
                
                13,257,869
                
                
                12,776,295Effect
                    of dilutive securities:Stock
                    options
                
                
                370,685
                
                
                670,505
                
                
                309,002Denominator
                    for diluted earnings pershare
                    - adjusted weighted averageshares
                
                
                14,344,584
                
                
                13,928,374
                
                
                13,085,297
  Options
        to purchase 2,083,601, 1,344,350 and 1,238,082 shares of common stock that
        were
        outstanding at November 30, 2005, 2004 and 2003, respectively, were not included
        in the computation of diluted earnings per share because their effect would
        be
        anti-dilutive.
  **13.**
              **Stock
                  Option Plan and Warrants**
  During
        Fiscal 1995, the Company implemented the 1995 Stock Option Plan (the "1995
        Plan"). During Fiscal 1996, the Company implemented the 1996 Stock Option
        Plan
        (the “1996 Plan”, and with the 1995 Plan, the “Stock Option Plans”). The 1995
        Plan and the 1996 Plan provide for the grant of options to purchase up to
        231,570 and 6,768,430 shares of the Company’s common stock, respectively, either
        as incentive stock options (“Incentive Stock Options”) within the meaning of
        Section 422 of the United States Internal Revenue Code or as options that
        are
        not intended to meet the requirements of such section ("Nonstatutory Stock
        Options"). Options to purchase shares may be granted under the Stock Option
        Plan
        to persons who, in the case of Incentive Stock Options, are employees (including
        officers) of the Company or, in the case of Nonstatutory Stock Options, are
        employees (including officers), consultants or nonemployee directors of the
        Company. The 1996 Plan was amended in September 2005 to allow for the
        issuance of restricted shares of the Company’s common stock.
  F-30
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 The
        exercise price of options granted under the Stock Option Plans must be
        at least equal to the fair market value of such shares on the date of grant
        or,
        in the case of Incentive Stock Options granted to a holder of 10% or more
        of the
        Company's Common Stock, at least 110% of the fair market value of such shares
        on
        the date of grant. The maximum exercise period for which Incentive Stock
        Options
        may be granted is ten years from the date of grant (five years in the case
        of an
        individual owning more than 10% of the Company's common stock).
  In
        addition, the Company's Stock Option Plans provide for certain automatic
        grants of options to the Company's nonemployee directors in consideration
        for
        their services performed as directors of the Company and for attendance at
        meetings. It provides for a one-time automatic grant of an option to purchase
        25,000 shares of common stock at market value to those directors who were
        serving on the Board of Directors at the inception of the 1995 Plan and
        also to those persons who become nonemployee directors of the Company in
        the
        future, upon their appointment or election as directors of the Company. In
        addition, the Stock Option Plans provide for quarterly grants to each
        nonemployee director of the Company of options to purchase 6,250 shares of
        the
        Company's common stock at the market value on the date of each grant. The
        Company granted 125,000, 131,250 and 125,000 options to the nonemployee
        directors during Fiscal 2005, 2004 and 2003, respectively.
  A
        summary
        of the Company's stock options is as follows:
 **2005**
                
                **2004**
                
                **2003****Weighted**
                
                
                
                **Weighted**
                
                
                
                **Weighted****Average**
                
                
                
                **Average**
                
                
                
                **Average****Exercise**
                
                
                
                **Exercise**
                
                
                
                **Exercise****Shares**
                
                **Price**
                
                **Shares**
                
                **Price**
                
                **Shares**
                
                **Price**Options
                    outstanding,beginning
                    of year
                
                
                3,222,585
                
                $
                5.22
                
                
                2,643,640
                
                $
                4.60
                
                
                2,773,085
                
                $
                4.52Granted
                
                
                821,500
                
                
                5.82
                
                
                1,016,250
                
                
                6.35
                
                
                640,000
                
                
                3.72Exercised
                
                
                (584,060
                )
                
                3.52
                
                
                (411,640
                )
                
                4.20
                
                
                (159,704
                )
                
                2.15Cancelled
                    or lapsed
                
                
                (319,666
                )
                
                5.43
                
                
                (25,665
                )
                
                4.04
                
                
                (609,741
                )
                
                3.74Options
                    outstanding,end
                    of year
                
                
                3,140,359
                
                $
                5.65
                
                
                3,222,585
                
                $
                5.22
                
                
                2,643,640
                
                $
                4.60Options
                    exercisable,end
                    of year
                
                
                2,572,507
                
                
                
                
                
                2,444,758
                
                
                
                
                
                2,092,503Options
                    available forgrant,
                    end of year
                
                
                1,177,897
                
                
                
                
                
                1,679,731
                
                
                
                
                
                1,770,316Weighted
                    average fair valueof
                    options grantedduring
                    the year
                
                $
                1.25
                
                
                
                
                $
                1.46
                
                
                
                
                $
                1.26
  The
        weighted average fair value of each option has been estimated on the date
        of
        grant using the Black-Scholes options pricing model with the following weighted
        average assumptions used for all grants of: volatility of 54.0% in 2005,
        54.0%
        in 2004 and 65.2% in 2003; risk-free interest rate ranging from 3.39% to
        4.44%
        in 2005, 2.83% to 3.52% in 2004 and 2.16% to 2.85% in 2003; and expected
        lives
        of approximately 4.0 years.
  F-31
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 The
        following table summarizes information about stock options outstanding at
        November 30, 2005:
  Options
                
                
                
                Options**Weighted**
                
                **Outstanding**
                
                
                
                **Exercisable****Average**
                
                **Weighted**
                
                
                
                **Weighted****Range
                    of**
                
                
                
                **Remaining**
                
                **Average**
                
                
                
                **Average****Exercise**
                
                
                
                **Contractual**
                
                **Exercise**
                
                **Shares**
                
                **Exercise****Price**
                
                **Outstanding**
                
                **Life**
                
                **Price**
                
                **Exercisable**
                
                **Price**$1.72-$2.50
                
                
                219,797
                
                
                5.2
                
                $
                2.34
                
                
                219,797
                
                $
                2.34$2.63-$3.85
                
                
                289,083
                
                
                6.1
                
                
                3.15
                
                
                289,083
                
                
                3.15$4.13-$6.14
                
                
                1,434,629
                
                
                5.9
                
                
                5.49
                
                
                1,195,283
                
                
                5.42$6.20-$9.00
                
                
                1,146,850
                
                
                6.4
                
                
                6.87
                
                
                818,344
                
                
                6.81$9.38-$11.32
                
                
                37,500
                
                
                1.4
                
                
                10.60
                
                
                37,500
                
                
                10.60$15.56-$15.57
                
                
                12,500
                
                
                1.6
                
                
                15.56
                
                
                12,500
                
                
                15.56$1.72-$15.57
                
                
                3,140,359
                
                
                6.0
                
                $
                5.64
                
                
                2,572,507
                
                $
                5.45
 During
        fiscal 2005, 2004 and 2003, options for shares of the Company’s common stock
        were exercised by certain employees and directors. Tax benefits of $524,334,
        $328,297 and $87,230 in fiscal 2005, 2004 and 2003, respectively, were recorded
        as an increase to additional paid-in capital and a reduction of income taxes
        currently payable.
 
 **14.**
              **Segment
                  Information**
  Segments
        are defined as components of an enterprise for which separate financial
        information is available that is evaluated regularly by the chief operating
        decision maker(s) in deciding how to allocate resources and in assessing
        performance. Disclosure is also required about products and services, geographic
        areas and major customers. The Company’s segments operate principally in the
        United States with a presence in Canada; the Canadian presence contributed
        an
        immaterial amount to consolidated net revenues and consolidated net income.
        The
        accounting policies of the Company’s segments are the same as those detailed in
        Note 1.
  The
        Company’s three principle operating segments for Fiscal 2005, 2004 and 2003 are:
        (a) E-commerce, (b) Off-line Marketing Services, and (c) LEC Billed Products
        and
        Services. The balance of the Company's operations, immaterial individually
        and
        in the aggregate, are included as part of Corporate. This business segment
        delineation is consistent with the Company's management and financial reporting
        structure based on products and services. The Company evaluates performance
        based on many factors, with the primary criteria being each segment's adjusted
        EBITDA, which is defined as net income excluding (i) special charges, (ii)
        interest expense, (iii) interest and dividend income, (iv) net gains (losses)
        on
        the sale of marketable securities, (v) permanent impairment charges to
        long-lived assets, (vi) other nonoperating income, (vii) minority interest
        (income)loss, (viii) depreciation, (ix) amortization and (x) income taxes.
        The
        Company shares a common workforce and office headquarters, which precludes
        an
        allocation of all overhead components. Overhead items that are specifically
        identifiable to a particular segment are applied to such segment and all
        other
        overhead costs are included in Corporate. The following tables set forth
        the
        Company's financial results, by management’s performance criteria, by operating
        segment. All revenues are from nonintersegment sources, and, therefore no
        intersegment elimination applies.
  F-32
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 Corporate
        assets of approximately $26.5 million at November 30, 2005, consist principally
        of cash, cash equivalents and marketable securities.
  **Segment
                      Data - Net revenues****Net
                      Revenue****Year
                      Ended November 30,****2005**
                  
                  **2004**
                  
                  **2003**For
                    the periods:E-commerce
                  
                  $
                  61,836,691
                  
                  $
                  34,979,223
                  
                  $
                  28,799,557Off-line
                      Marketing Services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,017,225LEC
                      Billed Products and Services
                  
                  
                  1,020,291
                  
                  
                  2,301,991
                  
                  
                  32,388,852**Consolidated
                      totals**
                  
                  $
                  62,856,982
                  
                  $
                  37,281,214
                  
                  $
                  32,388,852
 **Segment
                  Data - Gross
                  Profit****Gross
                    Profit****Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003**For
                  the periods:E-commerce
                
                $
                21,392,232
                
                $
                15,218,878
                
                $
                16,945,847Off-line
                    Marketing Services
                
                
                —
                
                
                —
                
                
                1,755,439LEC
                    Billed Products and Services
                
                
                412,490
                
                
                9,726
                
                
                607,011**Consolidated
                    totals**
                
                $
                21,804,722
                
                $
                15,228,604
                
                $
                19,308,297
   F-33
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
 **Segment
                    Data - Adjusted EBITDA *****Adjusted
                    EBITDA****Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003**For
                    the periods:E-commerce
                
                $
                7,609,750
                
                $
                4,822,184
                
                $
                2,822,141Off-line
                    Marketing Services
                
                
                —
                
                
                —
                
                
                203,094LEC
                    Billed Products and Services
                
                
                318,763
                
                
                (481,215
                )
                
                132,075**Consolidated
                    totals**
                
                $
                7,928,513
                
                $
                4,340,969
                
                $
                3,157,310
 
 *
              Adjusted
                  EBITDA is net income excluding corporate level general and administrative
                  costs (including the exclusion of Corporate level depreciation
                  and
                  amortization), special charges, interest expense, interest and
                  dividend
                  income, net gains (losses) on the sale of marketable securities,
                  realized
                  gains on subsidiary sales, permanent impairment charges to long
                  lived
                  assets, other nonoperating income (expense), minority interest
                  (income)
                  loss, depreciation, amortization and income taxes.
   **Segment
                  Data -
                  Depreciation and Amortization****Depreciation
                    and Amortization****Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003**For
                  the periods:E-commerce
                
                $
                2,089,031
                
                $
                1,219,746
                
                $
                1,172,343Off-line
                    Marketing Services
                
                
                —
                
                
                —
                
                
                6,877LEC
                    Billed Products and Services
                
                
                —
                
                
                —
                
                
                —**Consolidated
                    totals**
                
                $
                2,089,031
                
                $
                1,219,746
                
                $
                1,179,220
  F-34
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 **Segment
                    Data - Reconciliation of Reportable segment’s Adjusted EBITDA to
                    consolidated income (loss) before taxes****Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003*****Adjusted
                    EBITDA - by segment***E-commerce
                
                $
                7,609,750
                
                $
                4,822,184
                
                $
                2,822,141Off-line
                    Marketing Services
                
                
                —
                
                
                —
                
                
                203,094LEC
                    Billed Products and Services
                
                
                318,763
                
                
                (481,215
                )
                
                132,075**Total
                    Adjusted EBIDTA**
                
                $
                7,928,513
                
                $
                4,340,969
                
                $
                3,157,310***Items
                    effecting Adjusted EBITDA in arriving at consolidated income
                    (loss) before
                    taxes***Corporate
                    (expense)
                
                
                (3,559,507
                )
                
                (3,455,067
                )
                
                (3,388,591
                )Depreciation
                    and amortization (expense)
                
                
                (2,089,031
                )
                
                (1,219,746
                )
                
                (1,179,220
                )Interest
                    income and dividends
                
                
                957,069
                
                
                544,153
                
                
                479,934Realized
                    gains on marketable securities
                
                
                561,359
                
                
                25,490
                
                
                19,730Realized
                    gain on sale of subsidiary
                
                
                195,000
                
                
                784,900
                
                
                1,375,801Other
                    non-operating income(expense)
                
                
                (28,076
                )
                
                398,118
                
                
                (54,068
                )Minority
                    interest in income of subsidiary
                
                
                (494,533
                )
                
                —
                
                
                (137,567
                )**Total
                    items effecting Adjusted EBITDA**
                
                
                (4,457,719
                )
                
                (2,922,152
                )
                
                (2,883,981
                )**Consolidated
                    income before taxes**
                
                $
                3,470,794
                
                $
                1,418,817
                
                $
                273,329
   **Segment
                  Data
                  - Long-Lived Assets****Long-Lived
                    Assets****Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003**E-commerce
                
                $
                11,306,884
                
                $
                9,009,210
                
                $
                4,575,576Off-line
                    Marketing services
                
                
                —
                
                
                —
                
                
                —LEC
                    Billed products and services
                
                
                —
                
                
                —
                
                
                —Corporate
                
                
                159,635
                
                
                271,282
                
                
                452,530**Consolidated
                    totals**
                
                $
                11,466,519
                
                $
                9,280,492
                
                $
                5,028,106
   F-35
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**
  **Segment
                  Data
                  -Total Assets****Total
                    Assets****Year
                    Ended November 30,****2005**
                
                **2004**
                
                **2003**E-commerce
                
                $
                26,255,710
                
                $
                16,900,522
                
                $
                12,382,137LEC
                    Billed products and services
                
                
                383,857
                
                
                245,038
                
                
                1,073,170Corporate
                
                
                29,623,197
                
                
                34,812,950
                
                
                36,557,637**Consolidated
                    totals**
                
                $
                56,262,764
                
                $
                51,958,510
                
                $
                50,012,944
  **15.**
              **Quarterly
                  Results of Operations
                  (Unaudited)**
  The
        following is a summary of the unaudited quarterly results of operations for
        fiscal 2005 and 2004:
  **Quarter
                    ended****November
                    30,**
                
                **August
                    31,**
                
                **May
                    31,**
                
                **February
                    28,****2005:**Net
                    revenues
                
                $
                16,598,155
                
                $
                16,372,442
                
                $
                16,610,569
                
                $
                13,275,816Gross
                    profit
                
                
                5,244,557
                
                
                5,614,899
                
                
                6,083,820
                
                
                4,861,446Income
                    before income taxes
                
                
                639,407
                
                
                578,573
                
                
                1,193,277
                
                
                1,059,537Net
                    income
                
                
                780,525
                
                
                316,667
                
                
                707,684
                
                
                623,281Basic
                    income per share
                
                $
                0.05
                
                $
                0.02
                
                $
                0.05
                
                $
                0.05Diluted
                    income per share
                
                $
                0.05
                
                $
                0.02
                
                $
                0.05
                
                $
                0.04**2004:**Net
                    revenues
                
                $
                10,762,517
                
                $
                10,208,548
                
                $
                9,139,855
                
                $
                7,170,294Gross
                    profit
                
                
                7,215,861
                
                
                6,335,395
                
                
                5,137,014
                
                
                3,364,340Income
                    (loss) before income taxes
                
                
                185,848
                
                
                (254,978
                )
                
                1,023,709
                
                
                464,238Net
                    income (loss)
                
                
                120,852
                
                
                (124,321
                )
                
                664,792
                
                
                352,891Basic
                    income (loss) per share
                
                $
                0.01
                
                $
                (0.01
                )
                $
                0.05
                
                $
                0.03Diluted
                    income (loss) per share
                
                $
                0.01
                
                $
                (0.01
                )
                $
                0.05
                
                $
                0.03
   F-36
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 ***Traffix,
            Inc. and Subsidiaries***
 **Notes
            to Consolidated Financial Statements**
 During
        the fourth quarter of fiscal 2005, the Company realized $600,000 in bad debt
        recapture and $68,000 of interest income pursuant to a settlement of an
        arbitration matter.
  During
        the fourth quarter of fiscal 2004, the Company adjusted certain accrued expenses
        related to year-end bonus accruals. The total of such adjustment effectively
        reduced fourth quarter costs and expenses by approximately $180,000,
        correspondingly improving fourth quarter income before income taxes by the
        same
        amount. During the fourth quarter of fiscal 2004, the Company recorded the
        final
        purchase price allocation between goodwill and amortizable identifiable
        intangibles, as they related to a current year acquisition. This final
        allocation effectively increased fourth quarter amortization expense by
        approximately $130,000, pursuant to the final purchase price allocation
        differing from the preliminary allocation estimate recorded at August 31,
        2004.
        This adjustment effectively reduced fourth quarter income before taxes by
        the
        same amount, and served to offset the benefit of the fourth quarter accrued
        year-end bonus adjustment.
  **16.**
              **Subsequent
                  Events**
  On
        February 22, 2006, the Company’s Board of Directors declared a dividend of $0.08
        per share to shareholders of record as of March 6, 2006, payable on or about
        March 16, 2006.
   F-37
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  **SCHEDULE
        II - VALUATION AND QUALIFYING ACCOUNTS AND
        RESERVES**
 **Col.
                      A**
                  
                  **Col.
                      B**
                  
                  
                  
                  **Col.
                      C**
                  
                  
                  
                  **Col.
                      D**
                  
                  
                  
                  **Col.
                      E****Additions****Description**
                  
                  **Balance
                      at**
                  
                  
                  
                  **Charged
                      to**
                  
                  
                  
                  **Charged
                      to**
                  
                  
                  
                  **Deductions
                      -**
                  
                  
                  
                  **Balance
                      at****Beginning**
                  
                  
                  
                  **costs
                      and**
                  
                  
                  
                  **other**
                  
                  
                  
                  **Describe**
                  
                  
                  
                  **end
                      of****of
                      period**
                  
                  
                  
                  **expenses**
                  
                  
                  
                  **accounts**
                  
                  
                  
                  
                  
                  
                  
                  **period****Year
                      ended November 30, 2005**Reserve
                      for customer chargebacks
                  
                  
                  377,535
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  208,089
                  
                  
                  (1)
                  
                  $
                  283,449
                  
                  
                  (3)
                  
                  $
                  302,175Reserve
                      for fulfillment costs
                  
                  $
                  48,016
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  48,016
                  
                  
                  
                  
                  
                  (0
                  )Allowance
                      for doubtful accounts
                  
                  $
                  691,229
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  196,814
                  
                  
                  (4)
                  
                  $
                  (137,618
                  )
                  
                  (5)
                  
                  $
                  1,025,661Allowance
                      for data qualifications
                  
                  $
                  266,644
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  1,347,704
                  
                  
                  (1)
                  
                  $
                  1,356,034
                  
                  
                  (1A)
                  
                  $
                  258,314**Year
                      ended November 30, 2004**Reserve
                      for customer chargebacks
                  
                  $
                  406,352
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  2,252,289
                  
                  
                  (1)
                  
                  $
                  2,281,106
                  
                  
                  (3)
                  
                  $
                  377,535Reserve
                      for fulfillment costs
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  48,016
                  
                  
                  (2)
                  
                  
                  
                  
                  
                  
                  
                  $
                  48,016Allowance
                      for doubtful accounts
                  
                  $
                  872,603
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  406,699
                  
                  
                  (4)
                  
                  $
                  588,073
                  
                  
                  (5)
                  
                  $
                  691,229Allowance
                      for data qualifications
                  
                  $
                  93,498
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  1,249,805
                  
                  
                  (1)
                  
                  $
                  1,076,659
                  
                  
                  (1A)
                  
                  $
                  266,644**Year
                      ended November 30, 2003**Reserve
                      for customer chargebacks
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  2,107,482
                  
                  
                  (1)
                  
                  $
                  1,701,130
                  
                  
                  (3)
                  
                  $
                  406,352Reserve
                      for fulfillment costs
                  
                  $
                  628,083
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  231,225
                  
                  
                  (2)
                  
                  $
                  859,308
                  
                  
                  (6)
                  
                  $
                  -Allowance
                      for doubtful accounts
                  
                  $
                  326,127
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  572,871
                  
                  
                  (4)
                  
                  $
                  26,395
                  
                  
                  (5)
                  
                  $
                  872,603Allowance
                      for data qualifications
                  
                  $
                  359,820
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  $
                  1,094,626
                  
                  
                  (1)
                  
                  $
                  1,360,948
                  
                  
                  (1A)
                  
                  $
                  93,498
  
 (1)
              Charges
                  against revenues.
 (1A)
              Charges
                  to revenues.
 (2)
              Charges
                  against cost of sales.
 (3)
              Chargebacks
                  refunded to consumers.
 (4)
              Charges
                  to allowance.
 (5)
              Charges
                  against the allowance.
 (6)
              Fiscal
                  2003:
  Payments
                  made to fulfillment vendors
              
              $
              181,820Prior
                  year accrual reversals reducing current year’s costs:1Q03
              
              $
              524,0342Q03
              
              $
              95,1863Q03
              
              $
              10,0004Q03
              
              $
              48,268Fiscal
                  2003 4thqtr. Accrual reversals
              
              
              
              
              $
              859,308
    S-1